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Report  of  the 

Special  Fire  Insurance  Committee 


of  the 


Louisville  Board  of  Trade 


{  uo 

L-ii— .„. 


Full  Text  of  an  Act 

Creating  a 

State  Insurance  Board 

Approved  and  Signed 
March,  1912 


With  Graphic  Charts 


^th 


^^'S 


Graphic  Charts 
copyrighted 

BY 

George  H.  Holt 


S.  ZoRN,  Chairman 
Mahion  E.  Taylor 
Owen  Gathright 

W.  G.  MUNN 

Alfred  Bbandeis 
C.  B.  Castner 
J.  A.  Mathews 


SPECIAL    FIRE  INSURANCE  COMMITTEE 


SlnmstJtll^  Month  of  ^Svaht 


Louisville,  Ky.,  March  26,  1912. 

The  Directors  of  The 

Louisville  Board  of  Trade. 
Gentlemen: — 

Your  Special  Fire  Insurance  Committee  submits  herewith  a 
report  of  the  work  undertaken  in  pursuance  of  the  order  given  by  the 
Louisville  Board  of  Trade  at  the  annual  meeting  of  Jan.  6,  1911. 

The  report  consists  of  a  comaected  statement  of  the  several 
acts  of  the  Special  Fire  Insurance  Committee  together  with  excerpts 
giving  the  more  important  parts  of  the  publications  which  were 
issued  from  time  to  time. 

To  this  is  added  extracts  from  reports  received  from  Mr. 
Geo.  H.  Holt,  who  was  retained  by  the  Committee  to  advise  with 
reference  to  Fire  Insurance  technicalities. 

The  entire  report  is  commended  to  the  careful  consideration 
of  every  member  of  the  Louisville  Board  of  Trade  with  the  recom- 
mendation that  such  further  action  may  be  taken  from  time  to  time, 
as  the  Board  of  Trade  may  deem  necessary. 

Respectfully  submitted/' 


Chairman. 


Marion  E.  Taylor, 
Owen  Gathright, 
W.  G.  Munn, 


Alfred  Brandeis, 
Charles  E.  Castner, 
J.  A.  Mathews. 


Committee. 


THE  WORK  OF  THE 

Special  Fire  Insurance  Committee 

OF  THE 

LOUISVILLE  BOARD  OF  TRADE 


Toward  the  close  of  the  year  1908,  improvements  in  the  water 
equipment  facilities  of  the  City  of  Louisville  costing  about  six  hun- 
dred thousand  dollars  were  nearing  completion.  The  hazard  of  the 
City  had  been  greatly  reduced  by  these  improvements  and  the  time 
was  thought  opportune  to  urge  the  removal  of  burdensome  increases 
in  fire  insurance  rates  which  had  been  in  force  since  the  Baltimore 
conflagration.  A  conference  took  place  between  representatives  of 
the  Louisville  Board  of  Trade,  the  Louisville  Water  Company  and 
the  Louisville  Board  of  Fire  Underwriters  at  which  assurance  was 
given  by  the  Underwriters  that  the  increases  complained  of  would 
be  removed  as  speedily  as  possible  through  the  approaching  applica- 
tion of  the  Dean  Schedule.  The  improvements  under  discussion  were 
completed  in  due  time  and  much  additional  work  was  performed 
to  comply  with  requests  made  by  the  National  Board  of  Fire  Under- 
writers, but  the  year  1911  began  with  the  high  fire  insurance  rates 
still  in  full  force  and  with  no  indications  that  the  long  deferred  re- 
ductions in  rates  would  be  granted  in  the  near  future. 

The  injustice  of  this  situation  was  presented  at  the  annual  meet- 
ing of  the  Board  of  Trade  on  Jan.  9,  1911.  Mr.  James  F.  Buckner, 
Jr.,  Superintendent,  in  his  report  called  attention  both  to  the  im- 
portant reduction  in  hazard  due  to  the  increased  water  facilities 
and  to  the  continued  failure  of  the  Underwriters  to  put  into  effect 
,  the  promised  removal  of  the  25  per  cent  advance  in  rates  imposed 
upon  Louisville  shortly  after  the  Baltimore  Fire.  The  meeting  acted 
upon  the  report  and  after  a  motion  by  Mr.  E.  H.  Bowen  ordered  the 
appointment  of  a  Special  Fire  Insurance  Committee  to  investigate 
the  subject  of  fire  insurance  rates.  The  Board  of  Directors  on  Jan. 
25th,  1911,  acting  upon  the  recommendation  of  the  President  of  the 
Board  of  Trade,  and  the  Executive  Committee,  named  the  following 
to  serve  on  the  Special  Fire  Insurance  Committee: 

S.  Zorn,  Chairman 
Marion  E.  Taylor  .  Alfred  Brandeis 

Owen  Gathright  Charles  B.  Castner 

W.  G.  Munn  J.  A.  Mathews 

-3  — 


ol-l-^^ 


^^ 


s- 


The  Special  Fire  Insurance  Committee  conferred  with  a  Com- 
mittee appointed  by  the  Louisville  Board  of  Fire  Underwriters  and 
endeavored  to  secure  a  prompt  and  adequate  readjustment  of  fire 
insurance  rates,  j  A^controversy  developed  which  continued  for  sev- 
eral months  terminating  in  the  assertion  by  the  Underwriters  that 
the  principles  and  practices  of  underwriting  upon  which  rates  are 
based  cannot  be  reviewed  by  those  in  other  lines  of  business.  <{^The 
Underwriters  compared  their  business  to  the  grocery  or  hardware__ 
trade  in  which  there  is  open  competition  and  claimed  equaflmmunity 
from  public  criticism  of  the  prices  charged.  The  Special  Fire  Insur- 
ance Committee  could  not  concede  the  analogy  claimed  by  the  Under- 
writers. The  Underwriters  are  admittedly  in  combination  to  fix  and 
maintain  a  common  selling  price. , >  Moreover,  the  courts  have  fre- 
quently decided  that  Underwriting  is  a  semi-public  business  and 
__  subject  to  regulation  in  the  public  interest^  An  attempt  was  made 
to  secure  information  by  which  the  Special  Fire  Insurance  Committee 
could  be  fully  and  correctly  informed  about  the  rating  situation  in 
Louisville.  The  Underwriters  resisted  the  effort  to  obtain  this  in- 
formation, although  called  for  by  the  Hon.  Charles  W.  Bell,  Insurance 
Commissioner  of  the  State  of  Kentucky.  The  Underwriters  main- 
tained that  investigation  of  fire  insurance  rates  is  not  among  the 
duties  assigned  to  the  Insurance  Commissioner  by  the  Act  which 
established  his  office.  The  Special  Fire  Insurance  Committee  felt 
that  there  should  be  an  authoritative  decision  on  this  point.  If  the 
laws  of  Kentucky  are  deficient  in  protecting  the  interest  of  the  buyer 
of  fire  insurance,  the  fact  should  be  made  known  and  an  effective 
legislative  remedy  sought  without  delay.  Attorneys  Carroll  and 
Middleton  were  retained  and  instructed  to  present  an  agreed  case 
to  the  Court  of  Appeals  for  a  decision  defining  the  scope  of  the 
authority  of  the  Insurance  Commissioner  in  matters  of  this  nature. 

The  lower  court  decided  that  the  Insurance  Commissioner  had 
no  power  to  make  the  desired  investigation.  Some  weeks  later  the 
Court  of  Appeals  handed  down  a  decision  which  reversed  the  opinion 
of  the  lower  court  and  sustained  the  position  taken  by  the  Attorneys 
for  the  Special  Fire  Insurance  Committee  in  every  particular. 
C  ^  Pending  a  decision  of  the  Court  of  Appeals  upon  the  power  to 
investigate  rates,  the  Special  Fire  Insurance  Committee  acted  upon  a 
suggestion  of  its  attorney  that  the  Legislature  of  Kentucky  had  ample 
power  to  impose  a  requirement  that  fire  insurance  rates  shall  be 
reasonable.  \  It  was  resolved  that  a  determined  effort  should  be  made 
to  place  the  control  of  fire  insurance  rates  with  a  State  Board  as  the 
only  final,  fair  and  just  solution  of  the  problems. 

The  Attorney  of  the  Committee,  Mr.  A.  J.  Carroll,  was  instructed 
to  prepare  a  model  bill  for  the  control  of  fire  insurance  rates  by  the 
State  of  Kentucky  and  a  state-wide  campaign  for  public  support  was 
determined  upon.  In  the  meantime,^lr.  Geo.  H.  Holt  of  Chicago_> 
and  corps  of  experts  had  been  retained  to  uncover  the  discriminations 
against  Kentucky  which  are  evidenced  by  comparison  of  Kentucky 
fire  insurance  rates  with  those  charged  in  neighboring  states.    Proof 

—4— 


of  amazing  discrimination  was  found  in  the  dwelling  rates  imposed 
upon  Kentucky  as  compared  with  those  in  force  in  Ohio,  Indiana, 
Illinois  and  particularly  in  Missouri  where  the  law  compels  the  in- 
surance companies  to  quote  reasonable  rates.  A  tabulation  of  com- 
parative charges  for  dwellings  was  prepared  based  on  the  schedule 
filed  with  the  Insurance  Department  of  Missouri  and  the  schedules 
in  use  by  the  Kentucky  Inspection  Bureau  and  the  Louisville  Board 
of  Fire  Underwriters.  This  tabulation  with  pertinent  comments  was 
sent  to  every  newspaper,  every  Commercial  Club  and  to  every  mem- 
ber of  the  Kentucky  Legislature  soon  to  convene.  Indignant  protests 
arose  on  every  hand  and  a  strong  sentiment  for  redress  became 
manifest.  Then  followed  the  publication  of  the  provisions  of  the 
proposed  Rating  law  together  with  letters  from  public  officials 
charged  with  the  administration  of  similar  laws  in  other  states.  Ad- 
ditional facts  were  given  out  showing  that  the  Dean  schedule  was 
being  applied  in  Kentucky  outside  of  Louisville,  on  a  basis  that  makes 
every  rate  exactly  one-third  higher  than  that  charged  for  a  precisely 
similar  risk  in  Ohio,  Indiana,  Illinois,  Missouri  and  Kansas.  This 
information  was  mailed  to  thousands  of  business  men  with  a  request 
that  the  sentiment  of  their  locality  with  reference  to  the  proposed 
Rating  law  be  made  clear  to  the  members  of  the  Legislature  without 
delay. 

The  response  to  this  appeal  was  remarkable.  Editorial  after 
editorial  appeared  in  the  press  of  Louisville  and  the  State  at  large 
commending  the  general  purpose  and  features  of  the  Rating  Law 
submitted  to  the  people  of  Kentucky  by  the  Special  Fire  Insurance 
Committee  "of  the  Louisville  Board  of  Trade.  Commercial  Club 
after  Commercial  Club  passed  resolutions  urging  active  support  of 
the  Bill  by  legislators.  These  resolutions  were  reinforced  by  personal 
letters  and  appeals  from  thousands  of  business  men.  A  tidal  wave 
of  interest  rolled  up  to  the  Capitol  City  which  bore  the  Bill  onward 
to  final  passage  and  enactment. 

Identical  Bills  were  introduced  in  the  two  Houses  of  the  Legis- 
lature on  Jan.  11,  1912,  and  referred  to  the  appropriate  Insurance 
Committees  upon  which  leading  Legislators  had  been  appointed  to 
serve.  A  joint  hearing  was  set  for  Jan.  24,  at  which  all  interested 
were  invited  to  appear  and  present  their  views.  The  hearing  took 
place  and  for  six  hours  the  two  Committees  gave  interested  attention 
to  the  arguments  put  forth  for  and  against  the  Bill.  At  the  close  of 
the  hearing  the  charges  made  in  the  opening  business  talk  of  Chair- 
man S.  Zorn  of  the  Special  Fire  Insurance  Committee  still  stood  out 
practically  unchallenged  by  the  speakers  for  the  Insurance  side. 
Gross  discrimination  against  the  people  of  Kentucky  was  conclusively 
proved. 

The  sixteen  members  of  the  two  Committees  voted  unanimously 
to  report  the  Bill  favorably  with  some  minor  amendments  which  were 
satisfactory  to  the  Special  Fire  Insurance  Committee.  On  Jan.  29th 
the  Senate  passed  the  Bill,  thirty  members  voting  aye  and  none  voting 
no.    Owing  to  less  favorable  position  on  the  calendar  the  House  was 


v/ 


slower  in  taking  action,  but  not  less  emphatic  in  its  verdict,  78  for 
the  Bill,  7  against,  the  Bill  reaching  a  vote  on  Feb.  16th.  With 
the  signing  of  the  Bill  by  the  Governor  on  March  4,  1912  (after 
further  hearing,  in  which  the  insurance  companies  made  a  last 
stand),  the  finishing  touch  was  given  to  one  of  the  most  remarkable 
manifestations  of  public  sentiment  that  has  found  embodiment  in 
state  legislation.  From  the  day  that  the  first  notification  of  dis- 
crimination was  published  to  the  people  of  Kentucky  to  the  date 
that  the  Bill  was  signed  by  the  Governor,  about  100  days  elapsed. 
Unusual  unanimity  of  view  by  the  people  and  press  of  the  State 
found  expression  with  equal  unanimity  among  the  representatives 
of  the  people  and  contributed  to  the  rapid  progress  of  the  Bill  to 
final  enactment.  /The  work  of  the  Special  Fire  Insurance  Committee 
was  made  possible' by  the  guarantee  fund  furnished  by  public  spirited 
citizens  of  Louisville.^ 

"""^  The  Fire  Insurance  Committee  received  aid  from  many  sources 
in  developing  the  facts  which  convinced  the  people  of  Kentucky  that 
Legislative  action  was  necessary  to  remedy  the  injustices  with  which 
they  are  burdened.  Public  officials  in  other  states  wrote  frankly 
about  their  experience  in  administering  Rating  Laws  and  gave  valu- 
able advice.  Other  Commercial  Bodies  furnished  reports  giving  the 
results  of  investigations  of  insurance  practices  and  rates  which  they 
have  undertaken  many  facts  were  found  in  these  reports  which  threw 
light  upon  the  situation  in  Louisville  and  Kentucky.  In .  order  to 
illustrate  the  extent  of  the  work  done  and  the  conditions  disclosed, 
the  Special  Fire  Insurance  Committee  publishes  herewith  in  detail 
the  facts  pertaining  to  the  more  interesting  phases  of  the  research 
which  it  has  conducted. 

SCHEDULES 

Insurance  men  speak  of  the  Dean  schedule  as  if  it  were  practically 
the  only  one  in  use.  In  fact,  it  is  but  one  of  many  such  devices 
used  in  the  formation  of  rates  for  individual  buildings  and  contents. 
Its  application  is  limited  to  the  mercantile  class  in  the  nineteen 
states  controlled  by  the  association  of  companies  known  as  the  Union 
or  Western  Union.  The  Union,  however,  has  announced  that  in  the 
future  the  schedules  for  all  classes  will  be  made  over  to  conform 
to  the  Dean  structure,  which  departs  materially  from  former  prac- 
tice. The  former  practice  used  a  fixed  basis  rate  to  which  various 
charges  and  credits  were  attached,  all  expressed  in  cents  on  the 
hundred  dollars.  The  Dean  schedule  gives  a  series  of  tables  of  basis 
rates  from  which  the  rater  makes  the  desired  choice.  The  subsequent 
charges  and  credits  are  not  expressed  in  cents  on  the  one  hundred 
dollars,  but  in  percentages  of  the  basis  rate. 

ILLUSTRATION 

The  effect  of  this  change  can  be  explained  best  by  an  illustra- 
tion. If  the  rater  selects  the  "Sixty"  table,  the  basis  rate  of  a  given 
building  may  be  48  cents  and  the  charge  for  an  opening  at  20  per 


cent  is  9.6  cents.  If,  however,  the  "Eighty"  table  is  selected,  the 
basis  rate  of  the  same  building  will  be  one  third  more  or  64  cents 
and  the  charge  for  the  opening  will  be  increased  in  like  proportion 
from  9.6  cents  to  12.8  cents.  All  rates  found  under  the  Eighty  table 
are  one-third  more  than  those  found  under  the  Sixty  table,  the  risks 
being  precisely  the  same  in  both  cases.  This  peculiarity  of  the  Dean 
schedule  is  not  explained  to  the  public  when  the  table  in  use  is  high 
and  the  Special  Committee  experienced  some  difficulty  in  ascertaining 
that  the  Eighty  table  is  still  in  use  in  Kentucky,  although  in  Mis- 
souri and  Kansas,  where  the  Eighty  table  was  used  at  the  start, 
the  Sixty  has  been  substituted  in  recent  years.  No  explanation  has 
been  given  for  this  discrimination  against  Kentucky,  which  is  the 
more  marked  from  the  fact  that  the  table  used  in  Ohio,  Illinois  and 
Indiana  is  the  Sixty. 

DWELLING  RATES 

The  following  tabulation  was  prepared  to  show  the  discrimina- 
tion against  Kentucky  in  dwelling  rates. 

TABULATION 

Dwelling  rates  fixed  by  companies  in  Missouri  under  require- 
ment of  law  that  only  reasonable  rates  shall  be  lawful,  compared 
with  dwelling  rates  exacted  in  Louisville  by  a  combination  of  local 
agents  of  the  same  companies,  and  in  Kentucky  outside  of  Louisville 
by  a  combination  of  companies:         ^^^^^         ^^.^^^        ^^^^^^        ^^^^^ 

Metal  Roof.  Shingle  Roof.  Metal  Roof.  Shingle  Roof. 

St.  Louis '. 20  25  30  35 

Louisville    35  50  50  75 

(Note  that  the  existing  rates  in  St.  Louis  are  15  cents  for  both 
classes  of  brick  instead  of  20  cents  and  25  cents,  and  also,  that  the 
higher  rates  have  not  been  accepted  as  complying  with  the  law.) 

Towns  of  second  rank  in  fire  protection: 

Brick,  Brick,"""""   Frame,""'^"    Frame, 

Metal  Roof.  Shingle  Roof.  Metal  Roof.  Shingle  Roof. 

Missouri  maximum 20  25  30  35 

Kentucky  basis 30  40  40  60 

Kentucky  maximum 50  65  65  90 

Third  Class : 

Missouri  maximum 20  25  30  35 

Kentucky  basis 35  45  45  65 

Kentucky  maximum 55  70  70  95 

Fourth  Class: 

Missouri  maximum 25  30  35  40 

Kentucky  basis 40  50  50  70 

Kentucky  maximum 60  75  75  100 

Fourth  and  one-half  Class: 

Missouri  maximum 25  30  35  40 

Kentucky  basis 45  55  55  75 

Kentucky  maximum 65  80  80  105 

—  7  — 


Brick,  Brick,  Frame,  Frame, 

Metal  Roof.  Shingle  Roof.  Metal  Roof.  Shingle  Roof. 

Fifth  Class: 

Missouri  maximum 30  35  40  45 

Kentucky  basis 50  60  60  80 

Kentucky  maximum 75  90  90  115 

Sixth  Class: 

Missouri  maximum 30  35  40  45 

Kentucky  basis 60  75  75  100 

Kentucky  maximum 95  115  115  150 

In  Missouri,  five  rooms  may  be  rented  for  boarders  without  extra 
charge.    In  Kentucky  a  charge  of  25  cents  is  added  for  three  boarders. 

In  Missouri  the  law  takes  the  hurden  off;  in  Kentucky  the  rate- 
makers  pile  it  on. 


RATES   IN   THE  CITY  OF   LOUISVILLE 

Louisville  is  known  among  Underwriters  as  an  "excepted"  city 
or  one  in  which  rates  and  commissions  are  fixed  by  a  Board  of  local 
agents  instead  of  by  the  companies.  The  extent  of  the  overcharge 
collected  by  the  Louisville  Board  during  a  long  term  of  years  was 
shown  by  tabulations  of  premiums  and  losses. 


EXCEPTED  CITY  TABULATION 

In  1903  Mr.  Wiley  S.  Littlejohn,  of  the  Excepted  Cities  Com- 
•  ^  mittee  of  the  Union,  prepared  the  following  tabulation: 

^^^   ^^^m^^f*^                                                                                                                   Per  Cent.  Per  Cent  of  Prems. 

4/J       _/                                                                      Premiums.                    Losses.              of  Prems.  Over  Losses. 

v^'^     f  Chicago   $58,419,458     $37,351,429  or  64  36 

Jk       \    Cleveland    11,347,794        8,056,233    "   79  21 

'             \  Milwaukee 12,225,699        7,333,701    "63  37 

r  .    LOUISVILLE   9,572,844        4,621,392    "49  51 

^      ""       Cincinnati 14,012,117        6,693,093    "    48  52 

i^  St.  Louis 22,138,343       15,306,962    "    69  31 

$127,716,255    $79,722,810        62  38 


It  appears  from  the  tabulation  made  by  Mr.  Littlejohn  that 
Louisville  had  been  very  profitable  as  compared  with  other  cities 
for  ten  years — nevertheless  the  local  Board,  according  to  its  own 
statement,  made  a  25  per  cent  advance  in  Louisville  rates  after  the 
Baltimore  fire,  M^hich  was  in  1904,  and  is  still  in  effect. 
(See  Graphic  Chart  No.  XI,  page  29.) 


SPECIAL  FIRE  INSURANCE  COMMITTEE  TABULATION 

Statement  of  fire  insurance  premiums  paid  and  losses  paid  in 
the  city  of  Louisville  during  the  twelve  years  ending  December  31st, 
1910: 

premiums.  Losses. 

Ten  years,  1899  to  1909 $10,772,630    $5,064,706 

For  year  1909 1,339,750         531,871 

For  year  1910 1,290,738         381,676 

Total  for  twelve  years $13,403,116     $5,978,253 

5,978,253 

Excess  of  premiums  over  losses $7,424,865 

Average  premiums  paid  per  annum $1,111,926 

Av.  excess  of  premiums  over  losses  per  annum 618,739 

Average  per  cent  of  annual  excess  of  premiums  over  losses 55% 

This  tabulation  shows  that  the  result  of  the  advance  in  rates, 
during  a  period  of  six  years,  was  sufficient  to  make  the  premiums 
collected  during  twelve  years  average  $2.22  for  each  dollar  of  loss 
distributed  by  the  Underwriters. 

t^ee  also  Graphic  Chart  No.  XII  and  No.  XIV,  pages  30-31.) 

C  ay  THE  EFFECTS  OF  RATING  LAWS  *.^ 

-.jii  tf/Ci Before  endorsing  the  proposition  of  a  rating  law  for  Kentucky, 
K  oV^^ine  Special  Fire  Insurance  Committee  made  a  thorough  inquiry  into 
^V^        the  effects  of  similar  laws  in  other  states.    The  reports  received  were 
ys)  ^  favorable  to  the  laws.     Rates  have  been  reduced  without  curtailing 
^/^|^y»^the  supply  of  sound  insurance.  -'No  company  has  left  a  state  or 
^^      hesitated  to  enter  because  of  the  operation  of  a  rating  law  and  thus 
far  no  decision  by  an  official  administering  such  a  law  has  been  chal- 
\jJ^      lenged  in  court.    The  companies  are  not  attempting  to  collect  as  high 
\jmN  rates  for  dwellings  in  the  states  mentioned  as  in  Kentucky,  and  the 
'j^^   Sixty  table  is  specified  in  connection  with  the  Dean  schedule  instead 
^/^    of  the  much  higher  Eighty  table  imposed  in  Kentucky.     Such  ex- 
actions   cannot   be   imposed   under  the   laws   of   these   other   states 
and  must  be  abandoned  under  similar  regulation  in  Kentucky.     The 
comparison  of  the  statistics  of  recent  experience  in  states  under  rate 
regulation  with  those  in  others  where  combination  is  permitted  with- 
out  rate   regulation,   forces  the   conclusion  that   the   rating  law  is  / 
solving  successfully  a  very  serious  problem,   the   reduction   of  tlie 
^excessive  expense  of  handling  the  fire  insurance  business.  / 

WASTEFUL  EXPENSE. 

%^ji^  The  Special  Fire  Insurance  Committee  received  several  reports  ' 

•^i^pm'similar  committees  and  from  State  commissions  in  which  there 

'P^s  general  agreement  that  the  expense  of  handling  the  fire  insurance 

*^^^    business  is  extremely  wasteful,  and  unwarranted  by  the  services  ren- 

yJ^        dered  to  the  public.    Many  Underwriters  admit  this  fact  and  deplore 

the  inability  of  the  companies  to  establish  more  reasonable  relations  or 

—9  — 


even  to  stop  the  constant  annual  increase  in  the  expense  ratio.  While 
there  is  general  agreement  among  all  investigators  as  to  the  nature 
and  extent  of  this  abuse,  there  is  disagreement  as  to  the  remedy  which 
will  be  effectual.  Considerable  importance,  therefore,  attaches  to  the 
indications  that  the  rating  law  is  solving  this  problem  successfully. 

The  apportionment  for  the  items  of  Company  and  Agency  Interests 
and  for  losses  which  results  from  the  levels  of  premiums  maintained 
under  regulated  combination  and  under  rate  regulation,  exhibits  a 
remarkable  contrast. 

Company  and  Agency 
Interests  Received.  Losses  Paid. 

Under  unregulated  combination 55  per  cent        45  per  cent 

Under  rate  regulation 40  per  cent        60  per  cent 

The  reason  for  this  difference  is  obvious.  So  long  as  it  is 
possible  through  combination  to  avoid  the  effects  of  uneconomic 
methods  by  keeping  rates  at  high  levels,  expenses  will  grow  until  the 
public  revolts,  "When  the  rating  law  removes  this  resource  by  per- 
mitting only  reasonable  rates  to  be  charged,  unreasonable  expenses 
must  cease.  The  payment  of  excessive  commissions  comes  to  an  end 
and  ultimately  the  salary  will  supplant  the  commission  wherever 
the  good  of  the  service  demands.  A  large  profit  will  be  reaped  from 
a  40  per  cent  allowance  whenever  the  companies  combine  as  assidu- 
ously for  this  purpose  as  they  have  combined  in  the  past  to  overtop 
unreasonable  expenses  with  top-heavy  rates. 

REPORT   SHOWING  THAT  NO   INSURANCE   COMPANY 

HAS   LEFT  A   STATE  BECAUSE  OF 

REGULATION  OF   RATES 

Extract  from  letter  signed  by  Hon.  Ike  S.  Lewis,  Superintendent 
of  Insurance,  State  of  Kansas: 

' '  In  answer  to  your  inquiry  concerning  the  workings  of  the  anti- 
discrimination laws  in  this  State  I  desire  to  say  it  has  given  very 
satisfactory  results.  I  know  of  no  companies  that  have  withdrawn 
from  the  State  on  account  of  this  law  and  at  this  time  there  are 
more  fire  companies  transacting  business  in  Kansas  than  at  the  time 
the  law  was  passed.  I  will  say,  further,  that  the  rates  of  insurance 
charged  in  this  State  are  lower  now  than  any  time  in  the  history  of 
the  State." 

From  letter  signed  by  Hon.  B.  P.  Sullivan,  Fire  Marshall  and 
member  of  State  Rating  Board,  State  of  Louisiana: 

''No  insurance  companies  have  withdrawn,  but  several  new 
companies  have  entered  the  State  during  the  year.  Have  ample 
insurance  companies  to  meet  the  requirements  of  the  people." 

From  letter  signed  by  Hon.  Frank  Blake,  Superintendent  In- 
surance Department,  State  of  Missouri: 

"An  act  providing  for  the  regulation  of  fire  insurance  rates  was 
passed  by  the  last  Legislature.    No  insurance  company  quit  the  State 

—10  — 


on  account  of  the  passage  of  said  act.  I  consider  that  there  are  suffi- 
cient fire  insurance  companies  now  operating  here  to  meet  the  require- 
ments of  the  people. ' ' 

From  letter  signed  by  Robert  L.  Pollard,  Secretary  State  Insur- 
ance Board  of  Texas: 

"So  far  as  this  Board  knows,  the  companies  are  in  the  main 
working  in  harmony  with  the  Board  and  no  insurance  companies 
have  withdrawn  from  the  State  because  of  the  law,  nor  have  any 
local  Texas  companies  retired  on  this  account." 

STATE  INSURANCE  BOARD 

The  provisions  adopted  in  the  Kentucky  Law  are  the  results  of  a 
careful  study  by  the  Attorney  for  the  Special  Committee,  of  the 
administration  of  similar  laws  in  other  states.  Good  features  in  these 
laws  were  selected  and  those  found  weak  in  actual  trial  were 
strengthened  or  rejected.  The  construction  of  a  rating  law  involves 
decisions  upon  two  questions  with  reference  to  which  opinions  differ. 
Shall  the  State  merely  supervise  rates  made  by  the  insurance  com- 
panies when  complaint  arises  or  shall  the  State  assume  the  entire 
responsibility  for  the  rates  and  issue  the  schedules  under  its  own 
imprint?  Shall  the  State  Insurance  Superintendent  alone  administer 
the  law  or  shall  there  be  a  State  Insurance  Board?  Of  the  states 
dealing  with  the  subject  two  had  pronounced  for  the  State  Board 
and  State  schedules  while  two  had  favored  company  schedules  and 
the  State  Insurance  Superintendent  as  the  sole  rating  authority. 
The  Special  Fire  Insurance  Committee  preferred  State  made  sched- 
ules for  the  reason  that  while  there  is  no  practical  difference  in  the 
final  result,  the  responsibility  is  more  clearly  defined  when  the  State 
takes  the  initiative  and  the  burden  of  proof  lies  with  the  companies 
to  show  that  the  State  is  in  error.  Moreover,  the  pretense  that 
schedules  are  the  product  of  irresponsible  individuals  engaged  in 
the  private  business  of  making  rates,  is  effectually  buried.  The 
State  Board  was  given  the  preference  because  it  offers  the  better 
safeguard  of  all  interests.  The  duties  and  training  of  the  office 
of  State  Insurance  Superintendent  are  such  that  these  officers  are 
in  great  demand  for  positions  of  trust  connected  with  the  insurance 
business.  There  is  less  chance  of  some  impropriety  resulting  from 
this  very  natural  situation  if  rate  regulation  is  handled  by  a  Board 
of  which  the  State  Superintendent  is  a  member. 


—11— 


KENTUCKY  STATE    INSURANCE   RATING    LAW 

An  act  relating  to  Fire,  Lightning,  Hail,  Windstorm  and 
Sprinkler  Leakage  Insurance,  and  to  regulate  and  control  the  rates 
of  premium  thereon,  and  creating  a  State  Insurance  Board  and  de- 
fining the  powers  and  duties  of  said  Board. 

Be  it  enacted  hy  the  General  Assembly  of  the  Commonwealth  of 
Kentucky: 

Sec.  1.  There  is  hereby  created  a  board,  to  be  known  as  the  State 
Insurance  Board,  which  shall  be  composed  of  the  Insurance  Commis- 
sioner of  the  State  of  Kentucky,  who,  in  addition  to  his  duties  now  im- 
posed by  law,  shall  act  as  Secretary  thereof,  and  two  other  members 
who  shall  be  citizens  of  the  State  and  be  at  least  twenty-five  years  of 
age,  to  be  appointed  by  the  Auditor  of  Public  Accounts,  one  of  whom 
shall  be  Chairman  of  the  board.  The  Auditor  of  Public  Accounts 
shall  appoint  two  members  immediately  after  this  Act  takes  effect  and 
the  appointments  so  made  shall  be  for  a  term  of  four  years.  The 
board  so  constituted  shall  exercise  all  of  the  powers  and  duties  and 
be  charged  with  all  the  responsibilities  embraced  in  this  Act  and  shall 
have  the  power  to  decide  all  questions  required,  authorized  or  per- 
mitted to  be  passed  upon  by  this  Act  or  incidental  to  the  powers  here- 
in conferred.  The  members  of  said  board,  other  than  the  Insurance 
Commissioner  of  the  State  of  Kentucky,  shall  each  receive  a  salary  of 
$3,000  per  annum.  The  Insurance  Commissioner  of  the  State  of  Ken- 
tucky shall  receive  $600.00  per  annum  in  addition  to  the  compensation 
now  received  by  him,  for  the  duties  imposed  by  this  act.  Said  board 
in  all  legal  matters  shall  be  represented  by  the  Attorney  General,  ex- 
cept when  it  is  impracticable  for  the  Attorney  General  to  represent 
said  board,  in  which  event  the  Attorney  General  is  hereby  empowered 
to  employ  an  attorney  to  represent  said  board,  but  the  compensation 
of  such  attorney  shall  not  exceed  $3,000  in  any  one  year  to  be  paid 
as  herein  provided,  and  to  employ  such  additional  clerks  or  agents  as 
may  be  necessary  to  carry  out  the  provisions  of  this  Act,  subject, 
however,  to  the  limitations  contained  in  this  Act  as  to  the  amount 
authorized  to  be  expended  by  said  Board.  The  salaries  of  all  the 
members  of  said  board  and  of  the  attorney  for  said  board  shall  be 
paid  monthly  out  of  the  treasury  of  the  Commonwealth,  out  of  the 
insurance  fund,  and  the  other  expenses  of  the  board  shall  also  be  paid 
out  of  said  fund,  and  all  payments  shall  be  by  the  warrant  of  the 
Auditor  upon  vouchers  signed  by  the  chairman  and  countersigned 
by  the  secretary  of  said  board.  The  office  of  said  board  is  fixed  in 
the  same  office  as  that  of  the  Insurance  Commissioner  of  the  State 
of  Kentucky,  and  all  of  the  regular  meetings  of  the  board  shall  be 
held  and  all  of  the  records  kept  in  such  office,  provided,  that  the 
board  may  hold  special  meetings  at  other  places  in  the  State  if  it  so 
determines.  The  office  of  said  board  and  of  the  Insurance  Com- 
missioner of  the  State  of  Kentucky  shall  always  be  kept  together, 
and  the  clerical  (force  of  said)  board  and  said  Insurance  Commis- 

-12  — 


sioner  shall  be   jointly  employed   and   their   services   used   for   the 
work  of  both  of  said  offices. 

Sec.  2.  Every  insurance  company  licensed  to  do  business  in  this 
State,  and  doing,  at  the  time  that  this  act  shall  take  effect,  a  business 
of  insurance  against  loss  or  damage  by  fire,  lightning,  hail,  windstorm 
or  sprinkler  leakage,  shall  within  thirty  days  thereafter  file  with  the 
Secretary  of  the  said  board : 

'*A.  Two  copies  of  every  general  basis  schedule  now  being  ap- 
plied in  this  State,  showing  all  charges  and  credits,  terms,  privileges, 
riders  and  conditions,  which  in  any  wise  affect  rates,  or  the  cost  of 
insurance  on  property  located  in  this  State. 

"B.  Two  copies  of  every  book  of  published  specific  estimates 
or  rates  with  inserts  showing  revisions  and  additions  to  date;  two 
copies  of  every  printed  rate  card  when  the  rate  card  system  is  in 
use ;  and  two  copies  of  a  statement  showing  every  specific  rate  not 
given  in  a  book  of  estimates  or  rates,  or  not  given  in  a  set  of  printed 
rate  cards." 

''The  grade  of  each  town  or  municipality  shall  be  shown  in  con- 
nection with  such  information,  together  with  two  copies  of  the  inspec- 
tion report  (upon)  which  each  town  has  been  graded.  The  basis 
tables  of  the  Analytic  System  that  are  in  use  in  various  localities  shall 
be  stated.  In  each  case  where  the  rate  has  not  been  formed  by  the  ap- 
plication of  a  general  basis  schedule,  the  fact  shall  be  noted.  The  in- 
formation shall  show  also  the  general  type  of  construction  and  occu- 
pancy of  each  risk,  and  if  it  is  protected  by  automatic  sprinklers  the 
fact  shall  be  noted.  Provided,  that  all  companies  that  use  the  same 
general  basis  schedules  and  specific  rates  may  authorize  some  agent  to 
file  the  two  sets  of  required  information  in  common  for  all.  Any 
company  thus  represented  that  deviates  in  any  manner  or  particular 
from  the  information  filed  in  common  shall  file  in  addition  thereto  a 
full  statement  of  the  plan  of  deviation  which  it  follows.  It  shall  be 
the  duty  of  said  board  to  consider  the  information  thus  filed,  with 
reference  to  the  reasonableness  of  the  general  basis  schedules,  charges 
and  credits,  terms  and  privileges,  riders  and  conditions,  which  in  any 
wise  affects  the  rates  or  the  cost  of  insurance,  and  with  reference  to 
the  reasonableness  of  the  specific  rates  and  grading  of  towns  and 
selections  of  basis  tables.  And  said  board  shall  make  such  alteration, 
change,  rejection  and  substitution  as  will  enable  it  to  publish  rea- 
sonable general  basis  schedules,  showing  all  charges  and  credits,  terms, 
privileges,  riders  and  conditions  which  in  any  way  affect  rates  or  the 
cost  of  insurance,  so  that  a  reasonable  rate  may  be  formed  for  every 
(risk)  in  this  State  upon  which  insurance  of  every  kind  regulated  by 
this  Act  is  written.  After  the  publication  of  a  general  basis  schedule, 
in  the  manner  hereinafter  provided,  it  shall  be  used  by  each  inusranee 
company  regulated  by  this  Act  for  the  formation  of  specific  rates  on 
all  risks  of  this  class  to  which  the  schedule  applies.  The  rate  obtained 
by  faithful  application  of  the  appropriate  general  basis  schedule  pub- 
lished by  said  board,  shall  be  the  lawful  rate  in  this  State.     It  shall 

—  13  — 


be  unlawful  to  use  any  other  rate,  except  that  obtained  by  uniform 
deviation  from  published  schedule  rates  in  the  manner  hereinafter 
provided.  It  shall  be  the  duty  of  the  said  board  to  act  upon  as  full 
information  as  possible  in  the  preparation  of  a  general  basis  schedule, 
and  the  said  board  is  hereby  empowered  to  call  for  and  obtain  from 
the  insurance  companies  regulated  by  this  Act,  any  and  all  informa- 
tion that  it  deems  useful.  When  the  said  board  is  ready  to  publish  a 
general  basis  schedule,  it  shall  notify  all  insurance  companies  and 
other  interests  concerned,  by  mail  and  such  insurance  companies  and 
other  interests  shall  examine  the  provisions  of  the  said  schedule.  If 
objections  are  found,  the  objectors  may  file  the  objections  in  writing 
with  the  secretary  of  the  said  board  within  thirty  days  from  the  date 
of  notification  or  may  apply  for  a  hearing  upon  the  objections  within 
the  thirty  days.  If  no  objection  is  raised,  the  schedule  shall  be  pub- 
lished at  the  end  of  thirty  days  from  the  date  of  notification  and 
shall  take  effect  immediately.  If  objections  are  raised  or  a  hearing 
asked,  the  said  board  shall  take  action  thereafter  upon  the  objections 
and  requests  presented.  Such  action  by  the  said  board  shall  be  duly 
reported  to  all  parties  interested,  by  mail,  and  the  schedule  as  affected 
by  such  action  by  the  board  shall  be  published  within  fifteen  days 
after  such  notification  unless  some  interested  party  shall  appeal  to 
a  court  having  jurisdiction,  as  hereinafter  provided.  Any  interested 
party  shall  upon  request  be  placed  upon  the  mailing  list  of  the  said 
board  and  shall  thereafter  receive  due  notification  of  all  actions  taken 
by  the  said  board  that  affect  rates  or  the  cost  of  insurance  regulated 
by  this  Act.  It  shall  be  the  duty  of  each  insurance  company  governed 
by  this  Act,  individually,  or  through  some  agency  for  the  purpose, 
to  apply  each  general  basis  schedule  immediately  after  publication. 
The  specific  rates  found  by  the  schedule  shall  be  filed  with  the  sec- 
retary of  said  board  as  soon  as  found.  The  said  board  in  publishing 
each  general  basis  schedule,  shall  set  a  date  at  which  the  filing  of  all 
specific  rates  under  the  schedule  shall  be  completed,  but  such  date 
may  be  extended  for  cause  by  the  said  board.  All  insurance  governed 
by  a  general  basis  schedule  and  written  after  the  date  of  publication 
shall  be  entitled  to  the  rates  established  by  the  schedule.  During 
the  interim  prior  to  the  publication  of  a  general  basis  schedule  for 
a  given  class  of  risks,  the  existing  specific  rates  may  be  used  and  the 
existing  general  basis  schedule  may  be  applied  to  new  risks  and  to 
new  conditions  in  old  risks,  and  the  said  board  shall  make  such  tem- 
porary orders  modifying  existing  specific  rates  or  existing  general 
basis  schedules  as  the  situation  may  demand.  Such  modifying  orders 
shall  be  subject  to  the  same  course  of  procedure  as  prescribed  for 
the  publication  of  general  basis  schedule.  It  shall  be  the  duty  of 
the  said  board  to  provide  for  a  system  of  adequate  reports,  from 
insurance  companies,  their  employees  and  agents  or  from  property 
owners,  and  in  such  manner  as  the  board  may  deem  proper,  for 
the  purpose  of  showing  the  relation  of  losses  to  hazards  in  risks  and 
rates  of  loss  for  normal  and  sub-normal  risks.  Such  facts  shall  be 
given  suitable  publicity  by  the  said  board  and  shall  be  kept  accessible 
to  the  representatives  of  any  interest  that  may  wish  to  know  the 


—  14- 


facts  in  order  to  plant  the  removal  of  hazards  or  in  order  to  justify  a 
request  for  a  modification  in  a  general  basis  schedule  or  a  specific  rate 
filed  with  the  said  board. 

Sec.  3.  Every  insurance  company  which  shall  hereafter  take  out 
a  license  in  this  State  to  do  business  of  the  kind  coming  under  the 
provisions  of  this  Act,  shall  comply  with  all  the  requirements  hereof, 
except  that  the  information  filed  under  Section  2  shall  relate  only  to 
risks  which  are  not  governed  by  general  basis  schedules  published  by 
the  said  board  and  in  force  at  the  time  the  license  is  taken  out. 

Sec.  4.  The  said  board  may  at  any  time  alter  a  published  general 
schedule,  but  shall  observe  the  procedure  prescribed  for  the  publica- 
tion of  a  general  basis  schedule.  The  said  board  also  may  at  any  time 
and  in  like  manner  recall  a  published  general  basis  schedule  and  pub- 
lish an  entirely  different  basis  schedule  in  place  of  the  one  recalled. 
Any  specific  rate  may  be  changed  by  any  insurance  company  when  a 
survey  discloses  conditions  which  necessitate  an  altered  rate  through 
the  application  of  the  appropriate  published  general  schedule.  Such 
altered  rate  shall  be  filed  immediately  with  the  secretary  of  the  said 
board.  The  said  board  shall  prescribe  rules  for  the  keeping  of  proper 
records  by  all  companies,  bureaus  and  boards  dealing  with  the  appli- 
cation of  published  schedules  so  that  the  accuracy  of  the  application 
in  any  individual  case  can  be  ascertained  at  any  time  by  the  said 
board.  For  the  purpose  of  this  Act  such  bureaus  and  boards  shall  be 
considered  to  be  agencies  for  their  subscribers  in  the  business  handled. 
Any  insurance  company  may  pursue  a  plan  of  uniformly  reducing  all 
specific  rates  found  for  a  class  of  risks  by  a  general  basis  schedule.  In 
such  case  the  insurance  company  shall  file  notice  of  the  intention  to  so 
reduce  rates,  showing  the  extent  of  the  reduction. 

Sec.  5.  No  insurance  company  coming  under  the  provisions  of 
this  Act  shall  engage  or  participate  in  the  insurance  of  any  property 
located  in  this  State  until  it  has  complied  with  the  provisions  of  Sec- 
tion 2  and  Section  3  of  this  Act,  and  no  company,  officer,  agent  or 
representative  of  any  company  shall  write  insurance  at  a  rate  different 
from  the  rate  fixed  in  accordance  with  the  provisions  of  Section  2 
hereof,  or  refund  or  remit  in  any  manner  or  by  any  device  any  portion 
of  the  rates  so  established,  or  extend  to  any  insured  or  other  person 
any  special  credit,  privileges,  advantages,  favor,  inducement,  or  con- 
cession. 

Sec.  6.  All  general  basis  schedules  which  are  in  force  in  accord- 
ance with  the  provisions  of  this  act  shall  be  open  to  the  inspection  of 
the  public  and  each  local  agent  shall  have  and  exhibit  to  the  public  a 
copy  of  the  specific  rates  published  for  his  locality.  Whenever  a  risk 
is  first  rated,  or  re-rated,  the  local  agent  writing  the  insurance  thereon 
shall  furnish  to  the  property  owner  a  form  showing  all  details  in 
the  formation  of  the  rate. 

Sec.  7.  Whenever  any  insurance  company,  or  other  person,  or 
city  or  town  or  their  authorized  representatives  shall  be  dissatisfied 
with  any  regulation,  order  or  rate  adopted  by  said  board,  such  in- 
surance company,  person  or  municipality,  or  their  authorized  rep- 

—  15  — 


resentatives  shall  have  the  right  to  apply  in  writing  to  said  Board  for 
a  modification  or  change  of  such  regulation,  order  or  rate,  and  such 
writing  shall  set  forth  the  action  desired  and  the  reasons  thereof. 
Upon  refusal  of  said  board  to  take  the  action  desired  the  applicant 
shall  have  the  right  within  fifteen  days  to  bring  action  against  said 
board  in  the  Circuit  Court  of  this  State  at  the  domicile  of  the  com- 
plainant, or  where  the  risk  is  located,  to  have  such  regulation,  order 
or  rate  vacated  or  modified,  and  shall  set  forth  in  the  petition  therein 
the  particular  ground  or  grounds  of  objections  to  such  regulation, 
order  or  rate,  and  the  modification  or  change  desired,  provided  the 
said  fifteen  days  shall  not  begin  to  run  until  actual  notice  of  the 
action  on  said  application  has  been  given  to  said  applicant.  In 
any  such  suit  the  issue  shall  be  formed  and  the  controversy  tried  and 
determined  as  in  other  equity  cases  and  the  court  may  set  aside, 
vacate  or  annul  one  or  more  of  any  part  of  any  of  the  regulations, 
orders  or  rates  adopted  or  fixed  by  said  board,  which  shall  be  found 
by  the  court  to  be  unreasonable,  unjust  or  excessive,  or  inadequate 
to  compensate  the  company  writing  insurance  thereon  for  the  risk 
assumed  by  it.  No  injunction,  order  or  decree  suspending  or  re- 
straining directly  or  indirectly  the  enforcement  of  any  order  of  said 
board  shall  be  granted;  provided,  that  the  court  may  permit  any 
company  complaining  of  any  order,  regulation  or  rate  made  by  the 
said  board  to  write  insurance  at  the  rates  which  obtained  prior  to  the 
making  of  such  order,  regulation  or  rate  complained  of,  upon  con- 
dition that  the  difference  between  the  rate  complained  of  and  the 
rate  at  which  it  is  permitted  to  write  insurance  shall  be  paid  into 
court,  and  upon  the  final  determination  of  the  suit  shall  be  paid  to 
the  insurance  company  if  the  court  shall  find  it  entitled  to  the  same, 
or  to  the  holders  of  policies  written  by  said  company  after  the  rate 
complained  of  is  ordered,  as  the  court  may  deem  just  and  equitable ; 
and  provided  further,  where  any  person  or  municipality  or  other 
insured  or  their  representatives  is  the  complainant,  the  court  may 
order  the  difference  between  the  rate  deemed  reasonable  by  the  peti- 
tioner, and  the  rate  complained  of,  to  be  deposited  in  court  pending 
the  final  determination  of  the  suit,  in  the  same  manner  as  herein 
provided  for  where  the  insurance  company  is  the  complainant;  pro- 
vided further,  that  if  the  court  does  not  grant  the  order  hereinabove 
referred  to,  the  rate,  regulation  or  order  fixed  by  the  said  board  shall 
remain  in  full  force  and  effect.  Yfhenever  any  action  shall  be  brought 
by  any  insurance  company  under  the  provisions  of  this  section,  within 
said  period  of  thirty  days,  no  penalties  or  forfeitures  shall  attach  or 
accrue  on  account  of  the  failure  of  the  plaintiff  to  comply  with  the 
order  sought  to  be  vacated  or  modified  in  such  action  until  after  the 
final  determination  of  same.  Either  party  to  any  such  action,  if 
dissatisfied  with  the  judgment  or  decree  of  said  court,  may  appeal 
therefrom  as  in  other  civil  cases.  No  action  shall  be  brought  in  any 
court  of  this  State  to  set  aside  any  order  by  said  board  under  the 
provisions  of  this  act  (until)  all  the  remedies  before  the  said  board 
provided  for  herein  shall  first  have  been  exhausted  by  the  party  com- 
plaining. 

—  16  — 


Sec.  8.  The  governing  authorities  of  municipalities  of  any  class, 
board  of  trade,  commercial  bodies  or  other  kindred  organizations  shall 
be  authorized  to  apply  to  the  said  board  to  fix  fire  insurance  rates, 
orders  or  regulations  for  their  respective  counties,  municipalities,  or 
particular  localities,  or  special  class  of  risks  they  may  represent,  and 
to  test  the  reasonableness  of  such  insurance  rates,  orders,  or  regula- 
tions, which  may  affect  the  interest  they  represent,  before  the  court 
in  the  same  manner  as  provided  for  in  this  Act  where  suits  are 
brought  by  individual  insured  interests. 

Sec.  9.  Any  insurance  company  coming  under  the  provisions  of 
this  Act,  or  any  director  or  officer  thereof,  or  any  agent  or  person 
acting  for  or  employed  by  any  such  company,  who  alone,  or  in  con- 
junction with  any  corporation,  company  or  person,  shall  wilfully  do 
or  cause  to  be  done,  or  shall  wilfully  suffer  or  permit  to  be  done,  any 
act,  matter  or  thing  prohibited  or  declared  to  be  unlawful  by  this  act, 
or  who  shall  wilfully  omit  or  fail  to  do  any  Act,  matter  or  thing  re- 
quired to  be  done  by  this  Act,  or  shall  cause  or  wilfully  suffer  or  per- 
mit any  Act,  matter  or  thing,  described  by  this  act,  not  to  be  done,  or 
shall  be  guilty  of  any  wilful  infraction  of  this  Act,  shall  be  deemed 
guilty  of  a  misdemeanor  and  shall,  upon  conviction  thereof,  in  a  court 
of  competent  jurisdiction,  be  punished  by  a  fine  of  not  less  than  one 
hundred  dollars  and  not  more  than  three  hundred  dollars  for  each 
offense;  provided,  that  if  the  offense  for  which  any  person  shall  be 
convicted,  as  aforesaid,  shall  be  an  unlawful  discrimination,  such 
person  shall  be  punished  by  a  fine  of  not  more  than  three  hundred 
dollars  and  not  less  than  one  hundred  dollars,  or  by  imprisonment  in 
the  county  jail  for  a  term  of  not  less  than  thirty  days,  and  not  more 
than  ninety  days,  or  by  both  such  fine  and  imprisonment.  It  shall 
be  the  duty  of  the  said  board  to  inform  the  Attorney  General  and 
the  Commonwealth's  Attorney  of  the  district  wherein  the  offense  ha^ 
been  committed  of  any  violation  of  this  Act.  It  shall  be  the  duty  of 
the  attorney  of  the  said  board  to  prepare  all  of  the  evidence  for  the 
prosecution  of  persons  violating  this  act,  and  he  shall  appear  in  per- 
son at  all  trials  to  assist  the  Commonwealth's  Attorney  in  conducting 
the  prosecution. 

Sec.  10.  "Whenever  a  company  is  finally  convicted  in  a  court  of 
competent  jurisdiction,  of  violating  any  of  the  provisions  of  this  act 
as  provided  in  Section  9,  it  shall  be  the  duty  of  the  Insurance  Com- 
missioner to  revoke,  if  it  be  for  the  first  violation  of  this  Act  by  such 
company,  the  authority  of  such  convicted  company  and  its  agents  to 
do  business  in  this  State  for  a  period  of  three  months,  and,  if  it  be  a 
second  conviction,  the  authority  of  such  company  and  its  agents  shall 
be  revoked  for  a  period  of  twelve  months.  The  Insurance  Commis- 
sioner shall  give  notice  of  such  revocation  in  the  manner  now  re- 
quired by  law,  and  until  the  expiration  of  that  time  such  company  and 
its  agents  shall  be  without  authority  to  do  business  in  this  State,  and 
shall  forfeit  to  the  State  the  amount  of  the  unexpired  portion  of  any 
license  which  has  been  paid. 

Sec.  11.     No  person  shall  be  excused  from  giving  testimony  or 

—  17  — 


producing  evidence  when  legally  called  upon  so  to  do  at  the  trial  of 
any  person  charged  with  violating  any  of  the  provisions  of  this  act  on 
the  ground  that  it  may  incriminate  him  under  the  laws  of  this  State, 
but  no  person  shall  be  prosecuted  or  subjected  to  any  penalty  or  for- 
feiture for  or  on  account  of  any  transaction,  matter  or  thing  concern- 
ing which  he  may  so  testify  or  produce  evidence  under  the  authority 
of  this  act,  except  for  perjury  in  so  testifying. 

Sec.  12.  Said  board  shall  have  the  right,  at  any  time  it  may  be 
deemed  necessary  by  said  board  so  to  do,  to  examine  through  agents 
appointed  for  that  purpose,  or  otherwise,  the  books,  records  and  pa- 
pers of  any  insurance  company  affected  by  this  Act  and  which  per- 
tain to  the  rates  charged  for  insurance  regulated  by  this  Act,  and  to 
examine  the  surveys,  books,  records  and  papers  of  any  Board  of  Un- 
derwriters, Rating  Bureau  or  organization  of  any  character  composed 
of  insurance  companies  or  their  agents  or  person  or  persons  perform- 
ing duties  connected  with  rates  of  insurance  regulated  by  this  Act. 
If  any  insurance  company,  rating  bureau.  Board  of  Underwriters  or 
other  organization  or  agent  fails  or  refuses  to  submit  to  such  exam- 
ination, the  Insurance  Commissioner  shall  revoke  or  suspend  authority 
granted  to  such  organization  or  agent  to  transact  business  in  this 
State. 

Sec.  13.  The  total  amount  which  said  board  shall  be  authorized 
to  expend  in  one  year,  for  all  purposes,  shall  not  exceed  the  sum  of 
twenty-five  thousand  dollars.  It  shall  be  the  duty  of  the  Insurance 
Commissioner  of  the  State  of  Kentucky  to,  in  addition  to  the  amounts 
now  authorized  to  be  collected  by  him  and  paid  into  the  State  Treas- 
ury, collect  from  each  insurance  company  coming  under  the  provisions 
of  this  Act  and  doing  business  in  this  State  during  the  preceding  cal- 
endar year,  or  any  portion  thereof,  the  proportion  of  said  twenty -five 
thousand  dollars  which  the  gross  premiums  collected  by  said  com- 
pany during  such  year  from  persons  or  upon  property  located  in  this 
State  bears  to  the  aggregate  amount  of  gross  premiums  so  collected 
during  such  year  by  all  insurance  companies  affected  by  this  Act 
transacting  business  in  this  State,  provided  that  in  computing  such 
gross  premium  receipts  there  shall  be  deducted  therefrom  the  amount 
paid  out  for  reinsurance  and  for  return  premiums  or  cancelled  poli- 
cies. All  moneys  so  collected  by  the  Insurance  Commissioner  shall  be 
paid  into  the  State  Treasury  to  the  credit  of  the  Insurance  Depart- 
ment, for  the  purpose  of  paying  the  expenditures  authorized  by  this 
Act.  If  at  the  end  of  any  year,  it  shall  be  found  that  the  aggregate 
amount  expended  in  carrying  out  the  provisions  of  this  Act  during 
such  year  has  been  less  than  twenty-five  thousand  dollars,  the  amount 
remaining  unexpended  shall  be  applied  in  the  reduction  of  the  amount 
to  be  collected  from  said  companies  for  the  ensuing  year. 

Sec.  14.  The  provisions  of  this  act  shall  not  apply  to  purely 
mutual  or  to  purely  profit-sharing  fire  insurance  companies  incor- 
porated or  unincorporated  under  the  laws  of  this  State  and  carried 
on  or  by  the  members  thereof  solely  for  the  protection  of  their  prop- 
erty and  not  for  profit ;  nor  to  purely  co-operative  interinsurance  and 

—  18- 


reciprocal  exchange  carried  on  by  the  members  thereof  solely  for  the 
protection  of  their  property  and  not  for  (profit)  ;  nor  to  companies, 
societies  or  associations  organized  under  the  authority  and  patronage 
of  any  church  or  religious  denomination  for  the  exclusive  purpose  of 
insuring  the  property  of  churches  or  religious  denominations  and  the 
personal  property  of  the  pastors  and  ministers  thereof  against  loss  or 
damage  by  fire,  lightning  or  storm. 

Sec.  15.  Inasmuch  as  it  is  of  the  greatest  importance  to  all 
owners  of  property  in  this  Commonwealth  that  the  rates  of  premium 
charged  for  the  character  of  insurance  embraced  in  this  act  be 
properly  regulated  and  readjusted  at  the  earliest  practicable  time,  an 
emergency  exists  and  is  hereby  declared  and  this  act  shall  take  effect 
from  and  after  its  passage. 

Edward  J.  McDermott, 

President  of  the  Senate. 

Claude  R.  Terrell, 
Speaker  of  House  of  Representatives. 

Approved  March  4th,  1912. 

James  B.  McCreary, 

Governor  of  Kentucky. 


OPINIONS  OF  STATE   OFFICIALS  WITH    REFERENCE 
TO  THE  KENTUCKY  LAW 

Fred  S.  Jackson, 

4th  District,  Kansas. 

House  of  Representatives  U.  S. 
Washington,  D.  C. 

Washington,  Jan.  3,  1912. 

Mr.  S.  Zorn,  Chairman,  Special  Fire  Insurance  Committee  of  the 
Louisville  Board  of  Trade,  Louisville,  Ky. 

Dear  Sir: 

I  have  yours  of  December  29th  enclosing  the  proposed  fire  insur- 
ance law  of  Kentucky.  I  have  gone  over  it  carefully  and  find  no 
objections  to  it.  I  like  the  Board  idea  better  than  controlled  by  the 
Superintendent  alone,  but  this  was  the  best  we  could  do  at  the  time 
the  Kansas  law  was  drawn. 

Very  truly  yours, 

F.  S.  Jackson. 

(Congressman  Jackson  was  Attorney  General  of  Kansas  at  the 
time  the  Rating  Law  was  passed  by  that  State  and  successfully  de- 
fended the  law  in  the  suit  brought  by  the  companies  to  have  it 
declared  unconstitutional. ) 

—  19  — 


y  state  of  Missouri 

Insurance  Department 
City  of  Jefferson 

Frank  Blake,  Superintendent 

M.  D.  Aber,  Deputy  Superintendent 

A.  L.  Reeves,  Actuary 

January  16,  1912. 

Mr.  S.  Zorn,  Chairman,  Louisville  Board  of  Trade,  Louisville,  Ken- 
tucky. 
Dear  Sir: 

Your  letter  of  January  13th  received.  I  wrote  you  on  January 
2nd  that  the  bill  prepared  by  your  Committee  was  the  best  rating 
bill  I  had  yet  seen.    I  have  no  amendments  to  suggest  at  this  time. 

Our  Attorney-General  has  ruled  that  under  the  new  law  specific 
rates  cannot  be  filed  by  piecemeal,  but  that  all  the  specifics  for  the 
whole  State  must  be  filed  at  one  and  the  same  time.  The  companies 
keep  no  classified  experiences  tending  to  show  that  their  basis  sched- 
ules filed  are  reasonable,  when  tested  by  the  loss  experiences,  and  I 
rcently  directed  them  to  begin  such  a  classification  in  the  year  1912. 

I  have  examined  the  tabulation  comparing  dwelling-house  rates 
in  Missouri  and  Kentucky.  The  rates  set  down  for  Louisville  and 
Kentucky  are  higher  than  those  to  be  charged  in  ]\Iissouri  under  the 
new  basis  schedules.  Whether  this  is  justified  on  the  loss  showing  in 
Kentucky,  I  do  not  know. 

Extra  charges  are  made  under  Missouri  schedules  for  lack  of 
foundation  or  interior  lath  and  plaster  finish,  or  for  stovepipe,  etc., 
through  roof  or  side  of  building,  and  additional  percentage  reduction 
given  for  use  of  co-insurance  clause.  The  new  schedules  show  a 
reduction  of  five  cents  in  almost  all  towns,  except  in  St.  Louis,  where 
the  brick  rate  is  increased  five  cents,  but  I  have  seen  no  statistics 
justifying  this  increase  in  St.  Louis. 

Yours  very  truly, 

Frank  Blake, 

Superintendent. . 


HISTORY  OF  FIRE   INSURANCE   RATE   REGULATION 

Kansas  in  1909  was  the  first  State  to  pass  a  law  of  this  nature. 
Boards  and  associations  of  companies  had  been  dispersed  and  pro- 
hibited for  many  years,  and  rate-cutting  and  rebating  were  prevalent 
discriminations.  Certain  local  companies  and  many  local  agents  de- 
sired the  protection  of  a  law  prohibiting  these  practices  and  the  State 
officials  were  inclined  to  view  the  proposition  favorably  provided 
the  control  of  rates  were  placed  in  the  hands  of  a  State  oificer.  A 
bill  containing  this  provision  was  drawn  up  and  passed.  Subse- 
quently the  companies  sought  to  have  the  law  declared  unconstitu- 
tional in  the  United  States  Circuit  Court  of  Kansas.  Judge  Pollock 
of  the  court  upheld  the  constitutionality  of  the  law  in  every  particular 
and  after  some  months  of  delay  the  companies  took  an  appeal  to 
the  Supreme  Court.  The  opinion  of  Judge  Pollock  leaves  little  ground 
to  expect  a  reversal  of  his  position. 

The  next  State  to  deal  with  the  subject  was  Texas.  In  this  State 
the  companies  had  been  enjoined  from  conducting  a  rating  bureau. 
The  leading  insurance  men  of  the  State  prepared  a  bill  with  the 
intention  of  restoring  the  rating  system.  A  State  Rating  Board  was 
created  which  by  the  language  of  the  bill  should  be  dominated  by 
insurance  men  on  the  theory  that  insurance  men  alone  are  qualified 
to  pass  judgment  on  rates.  The  rates  promulgated  by  this  Board 
were  multiples  of  the  existing  rates  and  a  storm  of  protests  arose 
which  ended  in  the  remodeling  of  the  law  at  a  special  session  of  the 
Legislature  convened  for  that  purpose.  The  remodeled  law  does  not 
provide  that  the  Rating  Board  shall  be  composed  of  fire  insurance 
men. 

Louisiana  followed  Texas  with  a  similar  law  promoted  by  the 
Board  of  Trade  of  New  Orleans.  In  1911  the  local  agents  of  Missouri 
secured  the  passage  of  a  Bill  in  that  State  in  order  to  put  an  end 
to  rate-cutting  and  rebating.  Washington  recently  passed  a  law 
which  proved  to  be  defective  when  administered.  Insurance  men 
make  much  of  the  action  of  the  New  York  Legislature  which  in- 
vestigated the  subject  and  provided  for  publicity  and  regulation 
of  discrimination  without  positively  regulating  rates,  but  the  action 
of  a  State  having  many  large  insurance  companies  and  a  10-cent 
dwelling  rate  is  not  necessarily  convincing  to  the  State  that  pays 
these  large  insurance  companies  35  or  40  cents  for  the  same  thing. 

CLASSIFIED   STATISTICS 

The  Special  Fire  Insurance  Committee  is  not  alone  in  discovering 
a  dearth  of  information  bearing  upon  the  reasonableness  of  rates.  To 
most  business  men  the  statement  in  the  letter  of  Insurance  Superin- 
tendent Blake — that  the  insurance  companies  never  have  kept  any 
statistics  with  tvhich  to  adjust  rates  ivith  fairness — will  come  as  a 
shock.  Yet  it  is  the  truth  and  the  problem  of  establishing  reasonable 
rates  in  the  light  of  positive  knowledge  is  one  that  the  public  must 
solve  for  itself. 

—  21  — 


'i^ 


POLICY  FORMS 

The  striking  variation  in  the  policy  forms  and  riders  for  similar 
risks  in  different  parts  of  the  country  and  even  in  the  same  city  has 
been  brought  to  the  attention  of  the  Special  Committee  during  its 
investigation. 

The  amount  of  co-insurance  is  nothing  in  some  cases  and  in 
others,  75  per  cent,  80  per  cent  or  90  per  cent.  The  elimination  of 
discrimination  and  production  of  uniformity  in  these  particulars  will 
evidently  form  an  important  part  of  the  work  of  the  State  Rating 
Board. 


NECESSITY  FOR  STATE  CONTROL 

"We  believe  that  the  following  are  conclusive  reasons  for  the 
creation  of  a  State  Insurance  Board : 

Because  the  underwriters  have  banded  themselves  together  in 
secret  organizations,  under  heavy  penalties,  not  only  of  fines,  but  of 
business  ostracism  or  boycott  as  a  means  of  maintaining  their  unfair 
grasp  upon  the  people. 

Because  fire  insurance  premiums  are  a  tax  levied  by  monopoly, 
without  the  knowledge  or  consent  of  property  owners. 

Because  the  underwriters  in  the  State  of  Kentucky  claim  that 
the  laws  of  Kentucky  give  the  property  owner  no  power  to  question 
or  review  a  rate,  however  unjust,  and  affords  no  tribunal  or  official 
before  whom  the  property  owner  may  apply  for  remedy. 

Because  other  states  and  municipalities  and  organizations  within 
other  states  have  rights  of  review  and  redress,  which  were  not  granted 
by  the  laws  of  Kentucky  to  her  citizens. 

Because  the  citizens  of  Kentucky  ought  to  be  entitled  to  every 
right  and  remedy  to  which  the  citizens  of  any  other  state  are  entitled 
at  law  or  in  equity. 

Because  commerce  and  industry  are  now  handicapped  in  Ken- 
tucky as  compared  with  adjoining  and  sister  states,  and  this  handicap 
can  be  removed  by  legislation  similar  to  that  adopted  in  other  states, 
and  which  has  been  found  beneficial  wherever  adopted. 


NATURE  AND  EXTENT  OF  PROBLEM 

In  order  to  exhibit  in  the  clearest  possible  light  the  contrast 
between  conditions  as  they  existed  in  Louisville  at  the  time  of  the 
appointment  of  this  Committee  and  as  they  exist  today  under  the 
new  State  Insurance  Board  law  and  the  decision  of  the  Court  of 
Appeals,  we  quote  here  extracts  from  the  report  of  Mr.  Geo.  H. 
Holt,  made  from  time  to  time  from  October  25,  1911,  to  date. 

1—22  — 


EXTRACTS  FROM  THE  REPORT  OF 
GEO.  H.  HOLT 


PRELIMINARY  STATEMENT  OF  PROBLEM 

You  have  submitted  to  me  for  consideration  the  following 
problem : 

Is  Louisville  being  well  treated  by  the  Underwriters: 

(a)  Tested  by  recognized  standards; 

(b)  Tested  by  comparison  with  other  cities; 

(c)  If  not,  what  can  be  done  to  improve  conditions  in  the  public 
interest  ? 

The  information  which  you  are  able  to  submit  for  consideration 
is  meager  and  inadequate  for  a  final  determination,  but  is  sufficient 
to  justify  the  preliminary  statement  that  Louisville  is  not  being  well 
treated  by  the  Underwriters,  judged  by  any  standard  whatever. 

Consider  first  the  claims  made  by  the  Louisville  Board  of  Under- 
writers, as  follows: 

That  Louisville  is  now  and  always  has  been  treated  fairly  and 
generously  by  the  Board  of  Underwriters. 

That  rates  have  not  been  higher  in  Louisville  than  in  other  cities 
of  similar  class  of  hazard. 

That  the  Board  of  Underwriters  have  had  absolute  control  of 
rates,  rules,  etc.,  in  Louisville  for  a  great  number  of  years,  free  from 
interference  by  the  companies. 

That  about  1909  the  companies  represented  in  the  Board  de- 
manded that  the  Board  apply  the  Dean  Schedule  to  risks  covered 
by  that  schedule  for  the  purpose  of  securing  a  "uniform  system  of 
rating  throughout  western  and  southern  territory." 

That  the  Board  made  tests  of  the  proposed  new  schedule  and 
considered  it  unsatisfactory,  and  protested  against  the  demands  of 
the  companies,  and  after  a  long  continued  effort  succeeded  in  getting 
a  modification  of  the  application  more  favorable  to  Louisville  than 
the  one  proposed  by  the  companies. 

That  this  delay  has  been,  therefore,  in  the  interest  of  Louisville 
rather  than  of  the  companies. 

That  the  re-rating  of  the  business  section  under  the  Dean  Sched- 
ule will  produce  an  average  reduction  in  fire  insurance  premiums 
at  least  equal  to  the  25%  tax  or  after-charge  which  was  imposed 
by  the  Board  of  Underwriters  as  Louisville's  proportion  of  the  gen- 
eral tax  to  recoup  losses  in  the  Baltimore  Conflagration. 

That  the  Dean  Schedule  is  now  effective  in  Ohio,  Indiana,  Mich- 
igan, Minnesota,  and  Wisconsin,  including  the  cities ;  in  the  cities 
of  Chicago  and  St.  Louis;  and  in  the  states  of  West  Virginia  and 
Tennessee,  not  including  cities. 

That  they  have  submitted  to  your  Committee  certain  summaries 


of  the  re-rating  schedules  covering  a  certain  portion  of  the  business 
district,  but  decline  to  furnish  any  additional  information  or  to  ex- 
plain the  system  further. 

That  they  have  no  knowledge  of  rates  in  other  cities  or  states 
and  cannot  state  how  rates  elsewhere  compare  with  rates  in  Louis- 
ville upon  the  same  classes  of  hazard. 

That  they  have  furnished  sufficient  information  to  prove  that  the 
application  of  the  Dean  Schedule  in  the  business  district  will  greatly 
reduce  rates. 

The  Underwriters  have  furnished  certain  general  statistics  which 
are  set  out  herein  under  the  heading  "Louisville  Fire  Insurance 
Kecords."     (See  page  26.) 

COMMENT 

Your  Committee  contends  that  the  information  furnished  is 
not  adequate  to  form  the  basis  of  any  general  conclusion,  and  it  does 
not  establish  the  claim  of  the  Underwriters  that  the  application  of 
the  Dean  Schedule  throughout  the  business  district  will  greatly  reduce 
rates. 

The  property  and  insurance  values  located  in  the  areas  reported 
upon  are  not  of  an  average  character  and  are  not  of  sufficient  variety 
or  volume  to  form  the  basis  of  any  adequate  test. 

The  Underwriters  have  failed  to  give  you  any  satisfactory  answer 
to  your  inquiries  concerning  the  effect  of  the  application  of  the 
Dean  Schedule  in  other  cities.  This  makes  it  impossible  for  you 
to  make  comparisons  with  other  cities. 

Your  Committee,  therefore,  is  not  in  position  to  judge  either 
by  comparison  of  the  former  rates  with  the  present  rates;  or  by 
comparison  of  results  produced  in  Louisville  with  results  produced 
in  other  cities;  whether  the  application  of  the  Dean  Schedule  will 
or  will  not  effect  a  reduction  in  rates  in  accordance  with  the  claim  of 
the  Underwriters. 

The  Underwriters  also  refuse  to  give  out  to  property  owners  the 
"Schedule  of  Rate"  on  separate  properties,  to  which  they  are  entitled 
under  the  Dean  Schedule,  excepting  in  a  few  instances.  We  have 
carefully  examined  the  cases  which  have  been  placed  in  our  hands, 
including  the  Board  of  Trade  Building,  and  in  every  case  find  that 
the  schedule  has  not  been  correctly  or  fairly  applied  upon  the  basis 
of  the  schedule,  but  the  number  of  cases  is  too  small  to  generalize 
from. 

BALTIMORE  AFTER  CHARGE 

No  more  flagrant  example  of  discrimination  against  any  city 
could  be  found  than  the  25%  arbitrary  charge  which  the  Board  of 
Underwriters  imposed  upon  Louisville  as  its  part  of  the  general  tax 
to  recoup  losses  in  the  Baltimore  Conflagration. 

No  such  charge  was  imposed  upon  Baltimore  itself,  nor  was  it  im- 
posed upon  property  owners  generally  throughout  the  country. 

—  24  — 


^r 


i> 


Even  if  some  excess  charge  were  justifiable,  the  amount  of  the 
charge  and  the  long  period  through  which  it  has  been  collected  are 
entirely  indefensible  and  inexcusable.  Upon  the  basis  of  the  figures 
given  by  the  Underwriters  to  your  Committee,  we  estimate  that  this 
after-charge  which  has  been  imposed  upon  Louisville  property  owners 
has  produced  a  sum  equal  to  8%  of  the  total  insurance  loss  in  the 
Baltimore  Conflagration. 

As  Louisville  is  insuring  only  about  $180,000,000  of  property 
while  the  total  amount  of  insurance  outstanding  in  the  United  States 
approximates  $50,000,000,000,  the  injustice  of  collecting  8%  of  the 
Baltimore  loss  from  Louisville  alone  needs  no  elaboration. 

COMPARISON  WITH  RECOGNIZED  STANDARDS 


The  Underwriters  and  the  companies  have  in  their  possession 
all  of  the  statistics,  from  whatever  source,  which  show  the  result 
of  their  stewardship.  Through  their  daily  reports  and  the  multi- 
plicity of  records  and  reports  and  audits,  which  make  up  their 
system  of  accounting,  they  have  acquainted  the  insurance  companies 
with  every  detail  of  the  business.  Nothing  has  been  hidden  either 
in  the  way  of  rules,  rates,  permits,  favoritism,  discrimination,  relief 
rates,  competitive  rates,  rate  wars,  errors  and  corrections  of  classifi- 
cation, record  of  loss  adjustments  in  great  detail,  (a  most  illuminating 
source  of  information)  commissions,  rebates,  concessions,  profitable 
and  unprofitable  classes,  the  increase  or  abatement  of  hazards,  the 
improvement  in  water  supply  or  fire  protection,  and  numberless  other 
details  which  go  to  make  up  the  knowledge  upon  which  the  justice 
or  injustice,  the  adequacy  or  inadequacy  of  a  rate  or  of  a  rule  may 
be  determined. 

This  information  the  Board  of  Underwriters  refuses  to  make 
public,  and  also  refuses  to  have  any  disinterested  authority  examine 
into  it  in  the  interest  of  your  Committee. 

In  the  absence  of  more  complete  information,  we  are  able  to  make 
\  the  following  demonstrations: 

INSURANCE  STANDARD 

For  a  long  term  of  years,  rate-making  has  been  based  upon  the 
theory  that  50%  of  the  values  subject  to  fire  loss  would  be  covered 
by  insurance. 

Upon  that  theory  the  Underwriters  have  for  many  years  approved 
a  standard  distribution  of  premiums  into  the  following  items : 

Fire  losses,  conflagration  and  ordinary 60% 

All  expenses,  and  5%  for  profit 40% 

Total 100% 

A  computation  of  5%  upon  all  premiums  charged  throughout 
the  United  States  for  any  term  of  ten  years  or  more  will  produce 

—  25  — 


a  result  in  excess  of  the  conflagration  losses  for  that  period.  This 
proves  that  such  a  charge,  which  has  been  included  in  the  rate,  is 
adequate  to  meet  the  hazard  of  sweeping  conflagrations;  in  other 
words,  the  experience  of  the  United  States  is  that  the  conflagration 
risk  is  adequately  covered  by  the  5%  charge  heretofore  collected, 
without  any  necessity  for  collecting  an  arbitrary  after-charge  like  the 
Baltimore  after-Charge  imposed  upon  Louisville. 

The  schedule  is  based  upon  the  expectation  of  a  loss  not  exceeding 
$5.00  for  every  $1,000  of  insurance  during  the  previous  five  year 
period. 

LOUISVILLE  FIRE  INSURANCE  RECORDS 

Total  amount  of  insurance  at  risk,  as  reported  to  the  Board  of 
Trade  Committee  by  the  Board  of  Underwriters,  approximately 
$180,000,000. 

Normal  loss  of  $5.00  per  $1,000  of  insurance  at  risk  amounts  to 
$900,000. 

That  is  to  say,  the  normal  fire  loss  of  Louisville  is  $900,000  per 
annum. 

Tabulations  of  returns  made  by  the  Underwriters  to  the  State 
give  the  following  results: 

(See  Graphic  Chart  No.  10.) 

Premiums.  Losses. 

10  years  from  1899  to  1909 $10,772,620  $5,064,706 

15  years  from  1893  to  1907 15,390,379  7,293,836 

1909   1,339,750  531,871 

1910   1,290,738  381,676 

The  following  computation  gives  the  loss  ratio  that  would  be 
normal  for  the  premiums  paid  by  Louisville,  compared  with  the  loss 
ratio  actually  experienced : 

Year.  Premiums.  60%  for  Losses.         Actual  Losses.  Unbumed. 

1909   $1,339,750        $803,850        $531,871        $271,979 

1910   1,290,738  834,442  381,676  452,766 


Amount  unburned  to  the  credit  of  Louisville $724,745 

This  tabulation  shows  the  enormous  discrepancy  between  the 
normal  premiums  which  ought  to  have  been  collected  from  Louisville, 
and  the  premiums  which  have  actually  been  collected. 

It  shows  the  large  sum  which  has  been  taken  from  the  capital 
or  surplus  of  the  citizens  of  Louisville  and  diverted  to  the  use  and 
profits  of  (mainly)  non-resident  insurance  companies. 

If  other  cities  have  not  been  overcharged  in  the  same  proportion 
that  Louisville  has  been  overcharged,  then  the  Underwriters  have 
placed  a  handicap  upon  the  property  and  commerce  of  Louisville 
which  puts  it  at  a  disadvantage  in  the  competition  with  other  cities. 


UNDERWRITERS'  TEST  OF  RATES 

The  tests  which  were  made  by  the  Underwriters  to  determine 
the  basis  of  classification  to  be  applied  to  Louisville  under  the  Dean 
Schedule  were  doubtless  designed  to  ascertain  whether  the  application 
of  the  Dean  Schedule  would  produce  the  same  premium  income  (that 
is  to  say  gross  income)  that  was  being  collected  under  the  then  exist- 
ing system. 

That  is  not  what  the  citizens  of  Louisville  desire  or  what  they 
are  entitled  to.  If  the  seller  has  fixed  a  price  which  is  unjust  and 
excessive,  the  buyer  is  entitled  to  a  correction  of  the  excess.  The 
Underwriter  who  ignores  his  responsibility  to  the  property  owner 
and  shares  with  the  insurance  companies  such  unjust  gain  is  not  only 
guilty  of  extortion  but  of  a  violation  of  his  trust.  V 

"-^  The  Underwriters  in  Louisville  have  for  two  generations  exer-  ' 
cised  a  trust  toward  the  citizens  of  Louisville.  The  citizens  of  Louis- 
ville had  the  right  to  expect  that  the  Underwriters  would  act  as  their 
agents  and  represent  their  interests  adequately  and  justly  in  their 
relation  to  the  insurance  companies  furnishing  the  indemnity.  If 
from  motives  of  greed  or  selfishness,  or  by  reason  of  carelessness  or 
indifference,  they  have  exercised  their  trust  to  the  injury  and  loss  of 
their  principals  and  neighbors,  an  explanation  and  much  more  than 
an  explanation  is  due  from  them.  ,^ 

*-""'     PROOF  OF  OVERCHARGE 

I  have  prepared  and  hand  you  herewith  certain  graphic  charts 
which  give  in  a  condensed  form  the  proof  of  overcharge  and  dis- 
crimination. 

No.  10.  Louisville  Fire  Insurance  Records. 

No.  11.  Louisville  Ten  Years'  Experience— 1892-1902. 

No.  12.  Louisville  Premiums  and  Losses — 1899-1910. 

No.  13.  Louisville  Dwelling  Rates. 

No.  14.  Louisville  Cost  and  Return  to  Policy  Holder. 

We  have  also  tabulated  and  analyzed  fire  losses  in  Louisville 
for  the  past  five  years  and  have  classified  the  hazards  which  have 
caused  or  suffered  the  losses. 

These  calculations  show  not  only  discriminations  in  rates,  based 
either  upon  premiums  or  upon  loss  to  value,  but  they  also  serve  to 
disclose  the  nature  and  extent  of  the  remedies  which  should  be 
applied. 

These  tabulations  further  show  that  with  proper  treatment  of 
the  hazard  as  a  community  problem  instead  of  an  individual  problem 
and  with  the  proper  adjustment  of  rate  to  fire  loss,  the  fire  waste 
of  Louisville  should  drop  to  $400,000  or  less  per  annum  and  remain 
below  that  level  for  many  years  to  come,  and  the  cost  of  insurance 
should  decrease  in  proportion  to  the  savings  in  fire  waste. 

-27  — 


Proof  of  Overcharge  Graphic  Chart  No.  X 

Geo.  H.  Holt 

LOUISVILLE  FIRE  INSURANCE  STATISTICS 

Loss  to  Amount  at  Risk 

Amount  of  Insurance  at  Risk $180,000,000 

Normal  Loss  Ratio  at  $5  per  $1,000 900,000 

Normal  Loss  1909-1910 $     1,800,000 

Actual   Loss   1909-1910 913,547 

Savings  to  companies  1909-1910 $       886,453 

Normal  Loss  for  Two  Years $1,800,000 

Actual  Loss $913,547 

Savings $886,453 

Loss  to  Premiums 

Premiums  1909-1910 $2,630,488 

Normal  Loss  60%  of  Premiums $1,638,292 

Actual  Loss  913,547 

Savings  to  companies  1909-1910 $    724,745 

Normal  Loss $1,638,292 

Actual  Loss $913,547 

Savings $724,745 


Reduction  of  Premiums  proportional  to  Savings  =  Nothing. 

—  28  — 


Proof  of  Profit 


Graphic  Chart  No.  XI 
Geo.  H.  Holt 


LOUISVILLE 

Per  Cent  of  Losses  to  Premiums 

Compiled  from  Littlejohn's  Table  of  Excepted  Cities 
Ten  Year  Experience     1892  -  1902 

CLEVELAND 79% 


ST.  LOUIS 69% 


CHICAGO 64% 


LOUISVILLE 49% 


In  spite  of  this  low  loss  record,  the  Louisville  Board  of  Under- 
writers added  to  Louisville  rates  an  arbitrary  charge  of  25%  after  the 
Baltimore  Fire,  which  was  not  imposed  by  the  Boards  upon  the  other 
cities. 

This  chart  shows  that  Louisville  deserved  a  reduction  of  rates 
instead  of  an  advance  at  the  time  of  the  Baltimore  Fire. 


■29  — 


Proof  of  Profit  Graphic  Chart  No.  XII 

Geo.  H.  Holt 

LOUISVILLE 

Premiums  and  Losses 

Special  Fire  Insurance  Committee  Tabulation 
Twelve  Years     1899  - 1910 

Premiums  Paid $13,403,116 

Losses  Paid $5,978,253 

■^■■^^■■H    44.6% 

Normal  Premium $9;963,000 

Overcharge $3,440,000 

Louisville  Overcharge  34.6%  of  Normal  Premium. 

Continental  Experience  —  26  Years 

Spectator  Tables        United  States  and  Canada 

Premiums $281,440,712 

Losses $167,440,712—59.6% 

Rate  of  Premium  1910 : 

Kentucky $1.36  per  $100  at  risk 

United  States  and  Canada $1.11  per  $100  at  risk 

—  30— 


Proof  of  Overcharge 


Graphic  Chart  No.  XIII 
Geo.  H.  Holt 


LOUISVILLE 


Brick  Dwellings    Shingle  Roof 


ST.  LOUIS 15c 


LOUISVILLE 50c 


OVERCHARGE 35c 


Overcharge  Louisville  over  St.  Louis,  233  per  cent. 


MISSOURI  MAXIMUM  RATE 25c 


KENTUCKY  MAXIMUM  RATE 65c 


Overcharge  Kentucky  over  Missouri  260  per  cent. 


—31  — 


Proof  of  Overcharge 


Graphic  Chart  No.  XIV 
Geo.  H.  Holt 


LOUISVILLE 


Cost  and  Return  to  Policy  Holder 


Every  $1.00  received  for  Losses. 


Cost  Policy  Holder  in  Premium  Paid — ten  years'  experience. 


U.  S.  Continental $1.66 


Louisville $2.20 


Overcharge $  .  54 


Louisville  Overcharge  compared  with  all  United  States  33% , 


—  32  — 


GAIN  AND  LOSS  EXHIBIT 

I  hand  you  herewith  certain  tabulated  summaries  of  the  Gain 
and  Loss  Exhibits  as  shown  on  the  Convention  form  of  report  made 

")         annually  by  the  companies  to  the  States  of  Connecticut,  New  York 

r\  and   Massachusetts.     These   cover  the   years   1909   and   1910,    and 

J7>      combined.     (Page  34.) 

^ ^^  /^t  is  a  common  thing  for  the  Underwriters  to  make  the  claim^ 
that  there  is  "no  profit  in  the  business"  and  to  show  various  tabula- 
tions and  summaries  Which  seem  to  indicate  that  fact.  The  tabula- 
tions from  the  Gain  and  Loss  Exhibit,  however,  completely  disprove 
that  claim.  They  show  that  the  tabulations  prepared  by  and  for 
the  companies  cannot  be  accepted  as  a  basis  of  rate-making  without 
-  close  scrutiny  and  further  analysis.  ^^ 

The  reports  show  the  total  number  of  companies  reporting  to 
these  states.  The  smallest  number  of  companies  reporting  is  154  in 
Connecticut  in  1909  and  the  largest  number  is  232  in  Massachusetts 
in  1910.  Every  company  reporting  gives  practically  the  same  figures 
for  its  individual  company  for  each  of  the  states.  No  two  states 
have  the  same  list  of  companies  and  allowance  must  be  made  for  that 
fact  in  handling  these  statistics. 

NOTE— The  Graphic  Charts  are  copyrighted,  but  permission  is  hereby  given  for  their  use  and 
publication  with  the  report  of  your  Committee. 


—33  — 


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—  34- 


COMBINED  EXPERIENCE:  1909  AND  1910 

(Expressed  in  Millions) 

Conn.         N.  Y.  Mass. 

Risks  in  force  (average) 39,334        42,616      (not  given) 

Premiums  earned 479  554  580 

Underwriting  gain 34  31  72 

Investment  gain 35  42  40 

Combined  gain 69  73  112 

Carried  to  surplus 34  40  39 

Margin   paid   out    in   dividends    and 

otherwise    (except  expense  items)        35  33  73 

Dividends  to  Stockholders  and  Mutual  Policy  Holders  included. 

BURNING  RATIO 

Losses  incurred  upon  $100  at  risk: 

1909  1910     Combined 

Connecticut 316  .321  .318 

New  York 341  .346  .344 

Massachusetts  (not  reported), 

A  ratio  of  50e  per  $100  is  normal,  as  per  Insurance  Companies' 
published  standards. 

The  above  difference  ought  to  be  looked  into  in  the  public  interest. 


Rate  of  premium  earned  upon  amount  at  risk: 

Massachusetts    60 

New  York 65 

This  differs  amazingly  from  the  National  Board  figures. 


Losses  incurred  to  premiums: 

Connecticut   52.17 

New  York 55.05 

Massachusetts 49.88 

This  reflects  the  higher  loss  ratio  in  New  York  than  in  the  other 
two  states.  But  even  that  ratio  is  below  the  60%  standard  of  Loss 
to  Premium. 

The  whole  country  experience  is  therefore  below — not  above — 
the  expected  by  a  large  margin. 

The  Companies  had  the  money. 

What  did  they  do  with  it? 


Proof  of  Profit 


Graphic  Chart  No.  V 
Geo.  H.  Holt 


GAIN  AND  LOSS  EXHIBIT 
Banking  Department 

The  companies  claim  that  they  make  no  money  out  of  Underwrit- 
ing, but  make  their  large  earnings  out  of  the  "Banking  Department." 

Compare  the  combined  earnings  as  below: 

Conn.      N.  Y.      Mass. 

Underwriting  (millions) 34  31  72 

Investment  income  earned,  "        53  61  62 

That  shows  a  large  gain  from  underwriting,  but  still  larger  gain 
from  investments. 

Compare,  however,  the  amounts  shown  in  surplus: 

Conn.      N.  Y.      Mass. 

Underwriting  gain  in  surplus 34  31  72 

Invested  gain  in  surplus 35  42  40 

From  Underwriting  (Conn.)  $34,000,000 

From  Investments  (Conn.) . .  $35,000,000 


Combined  gain  in  surplus,  three  states : 

From  Underwriting  $46,000,000 
From  Investments    $39,000,000 


36  — 


Proof  of  Profit 


Graphic  Chart  No.  V-a 
Geo.  H.  Holt 


GAIN  AND  LOSS  EXHIBIT 


Banking  Department — Continued 


Note  the  losses  in  investments  which  have  come  out  of  invest- 
ment earnings: 

Conn.      N.  Y.      Mass. 

Investment  income  earned 53  61  62 

Investment  gain  in  surplus 35  42  40 

Loss  in  investments 18  19  22 


Earned  (Conn.)  153,000,000 

Carried  to  Surplus  $35,000,000 

Shrinkage $18,000,000 


In  other  words,  the  loss  on  sales,  or  upon  shrinkage  of  value,  in 
investments  approximates  $20,000,000,  which  is  now  shown  as  taken 
out  of  Investment  Earnings.    This  is  for  two  years  experience. 

What  item  was  it  taken  out  of  during  all  the  years  in  which  the 
companies  were  not  required  to  report  the  Investment  Department 
gains  and  losses? 

Where  did  the  Investment  Department  expenses  appear  in  those 
older  reports  which  are  now  utilized  to  show  that  in  a  long  term  of 
years  there  has  been  no  profit  in  underwriting? 


—  37  — 


We  have  a  right  to  be  shown  that  the  tabulations  of  a  long  term 
of  years  which  are  presented  as  an  argument  against  State  Rating, 
contain  facts  and  figures  which  are  germane  to  the  subject  and 
which  are  so  correlated  to  existing  conditions  and  prospective  con- 
ditions as  to  be  in  any  measure  controlling. 

These  are  problems  which  should  be  left  to  the  deliberate  and 
authoritative  determination  of  a  State  Rating  Board,  subject  to 
review  by  judicial  authority.  This  is  the  meaning  of  the  State 
Rating  Bills  now  proposed,  and  under  their  provisions  no  injustice 
will  fall  upon  any  individual  or  class.  Can  this  be  said  of  exist- 
ing conditions? 


DISCREDITED  STATISTICS 

The  statistics  submitted  by  the  underwriters  ought  not  to  be  ac- 
cepted without  full  investigation.  They  have  been  discredited  over 
and  over  again,  and  will  be  discredited  by  your  Committee  upon 
investigation. 

They  deal  with  facts  and  conditions  in  the  distant  past,  and  with 
companies  and  methods  long  since  defunct.  They  have  not  been 
tabulated  upon  any  approved  system  designed  to  disclose  the  facts 
in  the  public  interest. 

Within  the  past  two  years  the  companies  have  been  required  to 
report  to  certain  of  the  states  a  new  tabulation,  called  the  Gain 
and  Loss  Exhibit,  or  sometimes  called  the  Underwriting  and  In- 
vestment Exhibit.  We  have  now  in  printed  form  two  years  of  re- 
ports of  this  kind  for  more  than  two  hundred  companies,  and  these 
exhibits  totally  discredit  and  disprove  the  previous  tabulations  and 
summaries  of  published  results. 

The  difference  disclosed  between  the  tabulations  of  the  Gain 
and  Loss  Exhibits  and  the  previous  standard  tabulations,  designed 
by  the  companies  for  their  private  ends,  is  a  matter  of  enormous 
sums  of  money.  It  is  no  trifling  percentage,  but  an  appalling  sum. 
These  facts  are  known  to  the  insurance  men  themselves,  and  still 
they   publish   and   offer   you   the   discredited   statistics. 

Your  Committee  has  not  the  time,  nor  is  it  desirable  from  any 

standpoint,  that  it  should  undertake  to  investigate  and  pass  upon 

the  credibility  or  accuracy  of  this  mass  of  statistics.     That  work 

should  be  left  to  the  State  Rating  Board  and  its  organization,  de- 

N.    signed  and  equipped  for  the  purpose  and  bound  to  do  the  work 

^impartially. 


—  38  — 


SPECTATOR  TABLES 
(See  Graphic  Chart  No.  Ill,  page  46.) 

Take  another  set  of  figures,  compiled  from  THE  SPECTATOR 
Year-Book,  for  ten  years'  experience  from  1901  to  1910,  inclusive,  as 
follows : 

Capital  (average)    $     80,000,000 

Net  surplus  (average)    197,000,000 

Total  income  3,055,000,000 

Paid  for  losses 1,523,000,000 

Paid  for  dividends   240,000,000 

Expenses  other  than  losses  and  dividends 968,000,000 

Average  number  of  Stock  Companies.  .     323 

Average  number  of  Mutual  Companies    234 

Total    557 

Consider  that  item  of  "Expenses  other  than  losses  and  dividends," 
$968,000,000,  If  a  man  is  at  liberty  to  take  out  of  the  bag  all  that 
he  wants  to  spend,  how  much  will  he  leave  in  it  for  the  item  of 
*' Excessive  profits,"  to  be  returned  to  the  premium  payer  in  the 
form  of  reduced  rates?  How  long  will  the  premium  payer  probably 
wait  for  his  share? 

The  figures  of  Mutual  companies  are  properly  included,  because 
they  are  included  in  any  determination  of  the  inadequacy  or  equity 
of  rates.  They  are  included  by  THE  SPECTATOR,  and  must  be 
included  when  quoting  THE  SPECTATOR. 

These  are  the  figures  in  THE  SPECTATOR  Year-Book,  and  un- 
til you  juggle  with  them,  they  show  this  condition  of  things. 

They  include  all  of  the  recent  conflagrations,  San  Francisco, 
Baltimore,  Toronto,  Rochester,  Paterson,  Chelsea,  and  many  others. 
Think  of  that  a  moment !  These  profits  are  over  and  above  all  losses, 
conflagration  and  ordinary. 

The  Company  method  is  to  make  up  a  different  tabulation,  and 
to  shift  items  here  and  there,  and  then  to  draw  off  percentages  and 
partial  figures  of  one  kind  and  another,  so  that  when  they  present 
these  emasculated  statistics,  they  may  indeed  express  accurately  the 
results  of  such  calculations,  but  those  calculations  are  not  designed  to 
show  and  do  not  show  the  whole  state  of  the  case. 


—  39  — 


NO  SHRINKAGE  IN  CAPITAL  OR  SURPLUS 

To  state  the  facts  in  another  way,  utilizing  the  same  SPECTA- 
TOR table : 

Capital,  1910  $  94,734,035 

Capital,  1901   69,930,423 

Gain  in  Capital $  24,763,612 

Net  Surplus,  1910 $257,529,237 

Net  Surplus,  1901 162,083,426 

Gain  in  Surplus $  95,445,811 

This  shows : 

1910  Gain  in  Capital $  24,763,612 

1901  Gain  in  Net  Surplus 95,445,811 

Total $120,209,423 

There  has  certainly  been  no  shrinkage  in  capital  and  no  shrink- 
age in  surplus  in  the  ten-year  period,  although  that  period  includes 
all  of  the  great  conflagrations  mentioned — San  Francisco,  Baltimore, 
Toronto,  Rochester,  Paterson,  Chelsea,  etc. 

How  can  it  be  true  that  a  business  which  has  retained  its  capital 
and  satisfied  its  stockholders  so  that  the  value  of  the  stocks  of  these 
companies  is  today  approximately  3  to  1  in  the  market,  is  an  unprof- 
itable business? 

How  can  it  be  true  that  the  companies  make  no  money  in  under- 
writing but  make  ''great  profits"  out  of  the  "banking  business," 
when  these  particular  companies  make  their  reports  under  oath  as 
above  indicated? 


RATIO  OF  PREMIUMS  TO  INVESTMENT  EARNINGS 

The  tabulation  shows : 

Total  income  for  the  ten  years $3,055,370,182 

Total  net  premiums  for  the  ten  years 2,788,020,735 

Margin   $   267,349,447 

That  margin  is  all  that  the  compilation  shows  could  possibly  have 
been  received  from  the  "Banking  Department"  or  "Investment  De- 
partment," an  average  of  $26,700,000  per  annum. 

The  net  premium  income  was  an  average  of  $278,800,000. 

This  shows  the  relative  importance  of  "Investment  Income"  and 
* '  Premium  Income, ' '  according  to  this  table. 

We  do  not  accept  any  responsibility  for  THE  SPECTATOR  table 
excepting  to  quote  it  correctly.  We  do  not  try  to  reconcile  it  with 
the  Gain  and  Loss  Exhibit,  because  we  are  unable  to  do  so. 

—  40  — 


\ 


RECORD  SINCE  ORGANIZATION 

Page  7  of  the  Convention  form  of  Annual  Report  discloses  the 
following  items: 

No.  3.    Gross  premiums  received  from  the  organization  of  company. 

No.  4.     Total  losses  paid  from  organization  of  company. 

No.  5.  Total  dividends  declared  since  commencing  business:  (a) 
cash;  (b)  stock. 

The  tabulated  result  of  these  inquiries  has  not  been  published, 
but  an  examination  of  the  separate  reports  of  a  large  number  of 
companies  shows  that  almost  the  entire  amount  of  surplus  is  earned 
surplus,  accumulated  out  of  profits  in  the  business.  Surplus  earn- 
ings over  and  above  losses  and  expenses  and  dividends.  The  percent- 
age of  contributed  surplus  remaining  in  the  tabulation  is  so  small 
as  to  be  negligible  for  purposes  of  comparison.  It  is  far  less  than 
the  amount  of  stock  dividends  which  have  been  declared  out  of 
savings. 

It  is  impossible  to  maintain  that  a  business  which  has  accumu- 
lated such  a  vast  surplus  over  and  above  all  losses  and  expenses 
and  dividends  is  an  unprofitable  business. 

Why  should  the  State  of  Illinois  accept  the  insurance  companies* 
statistics  without  investigation  and  without  analysis? 

The  conflict  between  the  statistics  and  statements  published  by 
the  insurance  companies  for  public  consumption,  and  the  tabula- 
tions from  the  Gain  and  Loss  Exhibit,  ought  to  be  investigated  in 
the  interest  of  the  public  and  the  property  owners  and  of  the  com- 
panies themselves.  If  one  set  of  figures  is  right,  the  other  set  is  not 
right. 

CAPITAL  AND  SURPLUS 

Refer  now  to  the  State     Reports,  Table  No.  1,  showing  capital, 
surplus  and  percentage  of  capital  and  surplus  to  amount  at  risk. 
(Table  page  42,  also  Graphic  Charts  I  and  II,  pages  44,  45.) 

When  a  railroad  company  reports  its  earnings  as  a  certain  per- 
centage, that  percentage  is  figured  upon  capital. 

When  the  insurance  companies  figure  their  earnings,  and  reponV^ 
that  they  have  made  no  money,  the  percentage  is  figured  upon  the 
amount  at  risk,  not  upon  the  capital. 

The  seventy-two  millions  of  capital  in  this  country  (1910)  carried 
an  amount  of  insurance  at  risk  in  1909  and  1910  averaging  in  Con- 
necticut over  thirty-nine  thousand  millions,  and  in  New  York  over 
forty-two  thousand  millions. 

A  very  small  percentage  upon  forty  thousand  millions  is  a  very 
fair  percentage  upon  seventy-two  millions. 

After  paying  every  expense  and  extravagance  and  all  the  losses 
of  conflagrations  and  normal  fire  waste,  this  seventy-two  millions  of 
capital  or  less  has  put  by  in  surplus,  after  paying  dividends,  an  aver- 
age of  over  eighteen  million  dollars  per  year,  in  round  figures. 

—  41  — 


FROM  TABLE  I.  STATE  REPORTS 

CONNECTICUT 

Stock  Companies — Domestic  and  Foreign 
(Excluding  Mutuals) 


Capital 

Surplus 

Capital  and 
Surplus 

%  Capital 

and  Surplus 

to  Amt. 

Risk 

1909 

Conn.  Co's 

Other  States 

Foreign  Co's 

Conn.  Co's 

Other  States 

Foreign  Co's 

$  11,000,000 

49,807,067 

5,000,000 

$  22,052,569 
96,375,132 
25,736,272 

$  33,052,569 

146,182,198 

30,736,272 

.57 
.65 
.34 

1910 

$  65,807,067 

$  12,700,000 

53,600,000 

6,000,000 

$144,163,973 

$  24,876,069 

102,062,322 

26,313,390 

$209,971,039 

$  37,576,069 

155,662,322 

32,313,390 

.52 

.57 
.65 
.34 

$  72,300,000 

$153,851,780 

$226,151,781 

.52 

NEW  YORK 


1909 


1910 


N.  Y.  Co's.. 

Other  States 
Foreign  Co's 

N.  Y.  Co's.., 
Other  States 
Foreign  Co's 


$  21,050,004 

47,962,067 

(Not  rept'd) 


$  23,100,004 

52,520,000 

(Not  rept'd) 


$  63,351,265 
62  475,907 
38,394,690 


$164,221,862 

$  65,883,997 
69,176,492 
42,090,992 


$177,151,481 


$  84,401,269 

110,437,974 

(Not  rept'd) 


$  88,984,001 

121,696,492 

(Not  rept'd) 


MASSACHUSETTS 


1909 

Mass.  Co's 

Other  States 

Foreign  Co's 

Mass.  Co's 

Other  States 

Foreign  Co's 

$    3,600,000 

62,357,067 

8,400,000 

$    6,059,204 

119,214,881 

26,082,407 

$    9,659,204 

181,571,948 

34,482,407 

1910 

$  74,357,067 

$    4,100,000 

67,499,999 

9,700,000 

$151,356,492 

$    6,410,832 

126,760,343 

27,944,273 

$225,713,559 

$  10,510,832 

194,260  342 

37,644,273 

$  81,299,999 

$161,115,448 

$242,415,447 

These  two  examples,  one  of  them  taken  from  the  summary  of 
the  Gain  and  Loss  Exhibit,  and  giving  the  total  results  of  the  busi- 
ness since  the  organization  of  the  companies,  the  other  giving  the 
underwriters'  own  figures  as  reported  by  THE  SPECTATOR  Year- 
Book  of  ten  years'  results,  showing  what  money  they  started  with, 
what  they  took  in,  what  they  paid  out,  and  what  they  have  left, 
are  a  complete  disproof  of  the  methods  and  statements  of  the  under- 
writers which  purport  to  show  that  the  business  has  not  been  profit- 
able. 


NOT  BANKING  BUSINESS  . 

^^ 

The  Gain  and  Loss  Exhibit  has  demolished  the  fiction  that  the 
companies  make  money  in  their  "Banking  Business." 

There  is  no  such  thing. 

They  could  not  divert  a  dollar  from  their  insurance  business  to 
the  Banking  Business  without  acccounting  for  it  to  the  Insurance 
Department  of  the  State.  Their  own  charters  and  the  laws  of  the 
States  make  it  unlawful  for  them  to  engage  in  the  Banking  Business. 

tjU^     /it  was  a  false  pretense  always,  but  in  any  event  it, has  now  toA 

^^^.^  tanjj;  disappeared.  y 

There  is  not  a  column,  nor  a  figure,  nor  a  dollar,  available  to  wear 

the  mask  of  "Banking  Profit."     All  of  the  funds  of  the  company 

are  shown  as  part  and  parcel  of  the  Insurance  Business. 

If  diverted  from  that  business  to  the  "Banking  Business,"  they 
could  not  appear  upon  any  State  Report  as  a  resource  of  an  Insur- 
ance Company.  They  are  funds  which  the  company  must  hold  to 
meet  outstanding  oljligations,  and  as  a  function  of  the  Insurance 
Business.        ^  ^v  '         v  w 

Befuddl^^hinkii^i^-OT  intentional  deception  must  not  be  per- 
mitted to  cause  ,>Qr-6xcuse  overcharge  in  the  rate  of  premium,  or,.'- 
Xwanton  w^ste'OH  the  business    methods  of  the  companies.  v^ 


ENERAL  FINANCIAL  RESULTS 


rraphic  Charts  I,  II,  III,  IV,  VI  are  designed  to  present  "Proof 
of  Profit"  for  comparison  with  the  "Proof  of  Loss"  showing  made 
by  the  underwriters. 


—  43- 


Proof  of  Profit 


Graphic  Chart  No.  I 
Geo.  H.  Holt 


LATEST  FINANCIAL  SHOWING 

All  United  States  Stock  Fire  Insurance  Companies 
Reporting  to  Connecticut,  1911 


Capital  (including  Stock  Dividends) $68,200,000 


Book  value $191,600,000 


Market  value $214,400,000 


Profit $144,200,000 


Compiled  from  the  Spectator  Tables  and  current  market  reports. 
All  losses  of  every  kind  are  taken  into  the  account  in  these  figures. 


Proof  of  Profit 


Graphic  Chart  No.  II 
Geo.  H.  Holt 


RECORD  SINCE  ORGANIZATION 

Of  All  United  States  Stock  Fire  Insurance  Companies 
Reporting  to  Connecticut,  1911 

Contributed  Capital $56,000,000 

Stock  Dividends $12,200,000 

Accumulated  Surplus $127,500,000 

Cash  Dividends  paid $269,600,000 

Stockholders'  showing  since  organization $465,300,000 

All  losses  and  expenses  of  every  kind  accounted  for. 

See  Graphic  Chart  No.  1. 

Capital  (as  above) $68,200,000 

Market  value $214,400,000 

Profit  on  Stock  alone $144,200,000 


-45- 


Proof  of  Profit 


Graphic  Chart  No.  Ill 
Geo.  H.  Holt 


SPECTATOR  TABLES 

1901  •  1910 
Includes  all  Conflagrations  and  all  Companies 


This  is  the  amount  that  the  Stockholders  put  up  in 
Cash  and  Stock  Dividends 


$80,000,000 


This  is  the  amount  that  the  Policyholders  got  for  Losses 

in  10  years $1,523,000,000 


This  is  the  amount  that  the  Policyholders  did  not  get.  .$1,485,000,000 

EXPENSES  OTHER  THAN  DIVIDENDS  CASH  DIVIDENDS  SURPLUS 


Capital  and  Surplus  now  on  hand $277,000,000 

Capital 80,000,000 

Gain  in  Surplus $197,000,000 


—  46  — 


Proof  of  Profit 


Graphic  Chart  No.  IV 
Geo.  H.  Holt 


SPECTATOR  TABLES 

All  Foreign  Companies  (28) 

Licensed  in  Connecticut  Prior  to  1910 

Sent  to  U.  S.  from  Home  Offices,  1909-1910 $4,176,447 


Remitted  to  Home  Offices  from  U.  S.,  1909-1910 $15,332,232 


Net  amount  sent  abroad,  28  companies,  1909-1910 $11,155,785 


Note  the  net  gain  for  two  years  only. 


—  47  — 


Proof  of  Profit 


Graphic  Chart  No.  VI 
Geo.  H.  Holt 


GAIN  AND  LOSS  EXHIBIT 

All  United  States  Stock  Fire  Insurance  Companies 

Reporting  to  Connecticut,  1911 

Except  Spring  Garden 


Premiums  Received  since  Organization $3,400,000,000 


Losses  Paid  since  Organization. $1,900,000,000 


Balance  unaccounted  for.     What  became  of  it? $1 ,500,000,000 


Capital  of  these  same  Companies $68,200,000 


This  Chart  shows  all  fire  losses — conflagration  and  ordinary — and 
a  balance  of  premiums  received  of  FIFTEEN  HUNDRED  MILLION 
DOLLARS,  on  a  Capital  of  $68,200,000.  No  account  is  taken  here 
af  any  income  from  Investments  or  Banking.  That  would  be  ad- 
ditional. 


—  48- 


BASIS  RATE  JUGGLERY 

While  it  is  certainly  difficult  to  make  an  untrained  man  under- 
stand in  a  short  time  the  intricacies  of  the  Dean  Schedule,  and 
while  even  experts  are  mystified  by  it,  as  the  testimony  in  the  Mis- 
souri case  plainly  shows,  it  is  very  important  to  get  clearly  in  mind 
that  the  practical  application  of  this  basis  rate  to  cities  and  towns 
and  risks,  utterly  ignores  loss  experience  in  those  cases. 

It  is  in  fact  a  "joker"  by  means  of  which  any  jugglery  of  rates 
desired  may  be  effected. 

Mr.  Fetter,  the  expert  independent  rater  in  Missouri,  states  in 
his  testimony  under  oath,  that  while  the  printed  books  contain  only 
tables  from  60  to  120,  he  could  work  out  any  table  which  he  wished 
to  use  either  above  or  below  those  tables  from  20c  to  $4.00,  or  any 
other  figure,  and  still  be  using  "the  principles  of  the  Dean  Schedule." 
He  distinctly  states  that  he  could  so  manipulate  the  Dean  Schedule 
as  to  produce  any  result  that  he  desired  to  produce,  and  that  it 
would  still  be  the  Dean  Schedule. 

He  not  only  could  do  so,  but  he  actually  had  done  so  in  every 
case,  excepting  in  those  cases  in  which  he  had  been  directed  by  the 
Governing  Committee  to  raise  certain  particular  classes  an  arbitrary 
percentage. 

Practically  the  same  state  of  things  was  testified  to  by  Mr.  Persch, 
the  Illinois  rater;  Mr.  Sellers,  the  Indiana  rater;  Mr.  Waterworth, 
the  St.  Louis  rater. 

The  printed  definition  of  the  Dean  Basis  Rate  is  that  it  is  "the 
residuum  of  unanalyzed  hazard." 

Mr.  Persch  says  it  is  determined  "by  water  supply  and  fire  pro- 
tection in  a  town,  and  by  nothing  else." 

Mr.  Fetter  says: 

"A  basis  rate  under  the  Dean  Schedule  is  a  starting  point  at 
which  we  start,  according  to  the  height  of  the  building,  the  kind 
of  a  building,  and  the  location  according  to  fire  protection. 

"When  we  first  started  out  a  number  of  years  ago,  we  started 
out  with  an  80  table,  but  that  made  rates  too  high.  We  later 
dropped  to  the  70  table,  got  along  with  that,  and  found  it  still 
to  be  too  high;  and  we  started  to  use  the  60  table.  (Brick 
buildings. ) ' ' 

Q.  You  changed  tables  as  you  found  the  conditions  justi- 
fied it? 

A.     To  such  risks  as  the  Dean  Schedule  applied. 

Q.  Upon  what  theory  did  you  operate  to  determine  that 
these  rates  were  too  high? 

A.     By  tests ;  applications  of  the  ratings  themselves. 

Q.     How  would  you  know  that  you  had  the  rates  high  enough  ? 

A.     By  comparison  with  our  previous  rates  from  time  to  time. 

Q.  Well,  the  theory  of  making  a  rate  is  to  produce  a  reason- 
able  revenue,  isn't  it? 

—  49  — 


A.     That  is  my  understanding;  yes,  sir, 

Q.  How  did  you  find  out  that  a  reasonable  revenue  had  been 
produced  by  a  certain  table  of  rates? 

A.  By  comparison  with  our  previous  rates  that  we  thought 
were  right;  by  comparison  with  rates  in  my  own  of&ce. 

Q.  How  could  you  tell  by  comparing  them  with  the  rates 
what  experience  the  companies  had  had  on  different  classifi- 
cations ? 

A.  I  didn't  know  the  details  of  that  only  by  comparison 
with  the  general  level  of  rates. 

Q.  Were  you  supplied  with  any  figures  from  any  companies 
or  from  any  agencies  to  help  you  in  arriving  at  this  result? 

A.     No;  not  any  specific  figures. 

Q.     Then  it  is  more  a  matter  of  guesswork  ? 

A.     No,  sir;  it  was  a  comparison  with  the  previous  rates. 

Q.  But  you  did  not  collect  any  actual  data  upon  which  you 
predicated  the  loss  and  profits  of  the  insurance  companies  of 
the  State? 

A.     I  did  not;  no,  sir, 

Q,  Then  you  simply  arrived  at  that  result  by  a  general 
conclusion  in  your  own  mind? 

A,     By  the  application  of  those  schedules;  yes,  sir. 


Please  note  the  utter  disregard  of  Fire  Protection,  water  supply, 
loss  experience,  insurance  to  value,  classification  of  profitable  and 
unprofitable  rates,  the  effect  of  term  insurance,  cut  rates,  or  any  at- 
tempt to  learn  what  other  raters  were  charging  upon  similar  prop- 
ties  in  other  States, 

It  totally  abandons  the  theoretical  basis  and  justification  of 
schedule,  or  any  other  rating  system.  It  simply  fits  a  new  ass's  sMn 
upon  the  same  old  lion. 


Note  how  the  further  testimony  confirms  this: 

Q.  If  you  were  going  to  Tennessee  and  were  authorized  to 
put  in  force  and  effect  the  Dean  Schedule,  what  table  would 
you  select  for  Tennessee? 

A.  Oh,  I  would  start  out  with  any  table  and  see  what  results 
I  would  get;  the  general  level  of  rates.  I  would  keep  on  testing 
until  I  was  satisfied.  If  the  conditions  today  were  too  high,  I 
would  work  until  I  got  them  lower.  If  they  were  too  low,  I  would 
test  the  tables  until  I  got  them  where  I  wanted  them. 

Note:  Where  is  there  a  suggestion  in  all  this  that  Fetter 
had  any  conception  of  anything  like  "science"  in  rating,  or  any 
intention  whatever  of  adjusting  the  rate  to  loss  experience? 

He  rated  Kansas  City,  but  he  compiled  no  statistics  before  doing 
so,  and  made  no  attempt  to  do  so  afterward. 

—  60  — 


Mr.  Dudley,  of  the  Union  (on  June  26,  1906),  directed  him  to 
raise  Flouring  Mills  20% ;  Boot  and  Shoe  houses  40% ;  Saw  Mills 
15%,  and  Summer  Hotels  25% ;  and  he  thereupon  issued  a  circular 
to  that  effect. 

He  was  a  professional  "Independent  Rater;"  but  without  any 
change  in  any  condition  of  Water  Supply  or  Fire  Protection  or  of 
any  particular  hazard  in  a  risk  or  in  a  class,  he  promulgated  that 
great  advance  over  his  published  rates. 

HOW  FETTER  CLASSIFIES  TOWNS 

Q.     How  are  towns  classified? 

A.     Oh,  by  their  fire  protection  and  ordinances. 

Q.     That  is  fully  your  theory,  is  it? 

A,  Well,  some  other  details  may  enter  into  a  town  that  I 
can't  recollect  now. 

Q.     Do  you  classify  at  all  in  regard  to  fire  loss  ratio  ? 

A.    No;  not  the  classification  of  a  town. 

Q.    You  pay  no  attention  to  fire  loss? 

A.     No,  sir. 

Q.     Pay  no  attention  to  that  in  classifying  a  town? 

A.     No,  sir. 

Q.     In  fixing  a  rate,  do  you  study  fire  losses? 

A.  Well,  I  can't  say  that  I  give  it  a  general  study,  more 
than  a  question  of  whether  rates  are  getting  too  low  or  getting 
too  high. 

Q.  Well,  do  you  study  fire  losses  in  fixing  a  rate.  That  is 
the  specific  question. 

A.    Well,  I  cannot  say  that  I  do. 

Q.  You  do  not  allow  the  fire  losses  to  enter  into  fixing  the 
rate  at  all? 

A.     No,  sir;  not  as  to  one  locality. 

Q.  In  making  a  basis  rate,  or  fixing  a  rate  of  any  kind,  you 
have  no  fire  experience  to  which  you  refer? 

A.  No ;  only  the  fact  that  the  companies  in  general  are  mak- 
ing a  profit  in  a  State  or  not. 

Q.  Could  you  justify  and  defend  any  of  the  rates  that  you 
made? 

A.  No ;  only  taking  as  a  foundation  the  general  level  and  the 
fact  that  they  were  considered  in  that  proportion  in  that  schedule. 


This  certainly  shows  that  the  "Dean  Basis  Rate"  is  not  what  it 
purports  to  be,  and  it  may  be  and  is  manipulated  and  juggled  with 
everywhere  by  everybody  to  produce  the  same  result  that  had  been 
obtained  by  existing  schedules,  if  that  level  would  hold  the  business, 
and  was  as  high  as  "Underwriting  Judgment"  (not  of  the  rater  but 
of  the  Union  Governing  Committee)  decided  the  property  owner 
would  pay. 

—  51  — 


Words  could  not  make  it  clearer  that  the  public  is  deliberately 
and  purposely  and  systematically  deceived  by  fair  sounding  words, 
and  a  pretense  of  mathematical  and  scientific  measurement  of  hazard 
applied  to  every  State,  town  and  risk,  while  in  fact  the  ' '  Independent 
Rater"  is  a  tool  of  the  companies  who  has  little  or  no  underwriting 
knowledge  or  experience,  who  keeps  no  statistics  of  loss  experience, 
and  would  not  know  what  they  meant  if  he  did  keep  them.  He 
wouldn't  use  them  if  he  had  them,  not  because  they  would  not  be 
useful  and  valuable  if  kept  and  used  in  the  interest  of  the  public, 
but  precisely  because  the  companies  do  not  want  them  to  be  used  in 
the  public  interest.     That  is  all  there  is  to  it. 

The  Rater  is  no  "expert,"  except  in  making  the  new  schedule 
produce  the  same,  or  a  greater,  premium  than  the  old.  In  many 
places  that  rate  had  been  loaded  up  with  the  ''pink  slip"  charge. 
When  that  charge  had  become  so  offensive  to  the  public  and  dangerous 
to  the  companies  that  the  companies  feared  to  continue  it  as  such, 
they  interred  it  privately  and  decently  in  the  Dean  Schedule  appli- 
cation, and  hid  it  from  sight  without  experiencing  any  pang  of  lost 
income. 


—  52  — 


NEW  HORIZON 

To  show  how  far  and  how  rapidly  your  Committee  has  progressed, 
permit  me  to  call  attention  to  the  following  contrast: 

In  October,  1911,  the  Committee  of  the  Board  of  Underwriters 
declined  to  deal  further  with  your  Committee, 

Since  that  time,  you  have  passed  through  experiences  with 

The  Rating  Committee  of  the  Board  of  Underwriters; 

The  Board  of  Underwriters,  as  a  whole; 

The  appeal  to  the  State   Commissioner; 

The  hearing  before  the  Court  of  Appeals; 

The  transfer  of  attention  to  legislation; 

The  preparation  and  passage  of  the  Insurance  Bill; 

The  transfer  of  responsibility  and  authority  from  the  Under- 
writers to  the  State  Fire  Insurance  Board; 

The  favorable  decision  of  the  Court  upon  the  authority  of  the 
Commissioner ; 

The  campaign  for  and  enactment  of  the  Insurance  Board  Law; 

The  appointment  of  the  Commission; 

The  loss  of  control  of  rate  making  and  inspection  by  the  Board 
of  Underwriters; 

The  loss  of  their  power  to  continue  arbitrary  rules  and  rates,  etc. ; 

The  merging  of  responsibility  for  Louisville  with  the  Kentucky 
Inspection  Bureau; 

The  control  of  records  of  experience,  of  rating,  of  rules,  etc., 
has  also  passed  out  of  the  hands  of  the  Kentucky  Inspection  Bureau 
and  the  cooperating  insurance  companies  and  now  rests  with  the 
State  Insurance  Board. 

The  individual  and  the  public  now  have  the  same  standing  and 
the  same  right  to  the  information  that  the  insurance  companies  have. 


UNIVERSITY  OF  CALITOENIA  LIBEAEY, 
BERKELEY 


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Books  not  returned  on  time  are  subject  to  a  fine  of 
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expiration  of  loan  period. _^^^-^-^-==^=== 


JG  27  1921 


OCT  4  m^ 


Jiff  ' 


20m-ll,'20 


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